Why Stocks Aren't Fretting Over Rising Oil

The less obvious answer as to why rising crude hasn't scuttled the bull market is that energy is a far less important factor in inflation and corporate profits as it was during the 1970s.

Amid the energy price shocks of the '70s, 35% of American workers were unionized and organized labor was able to demand and receive "cost of living adjustments" for workers, says Tobias Levkovich, chief U.S. market strategist at Citigroup. Today, only about 6% of U.S. workers are unionized and unions are giving concessions. "Oil has risen more than seven-fold from $9 in 1998 and there hasn't been a [corresponding] uptick in wage inflation," he says, explaining why energy prices haven't driven inflation higher and forced the Federal Reserve to tighten, as many bears forecast.

This is significant because energy costs represent about 7% of S&P 500 companies' costs vs. 70% for labor, Levkovich says. Nevertheless, the financial press continues to refer to the 1970s-era playbook and fret about the "threat" rising crude prices presents to the bull case.

But while wages haven't risen at nearly the same pace as energy prices, it hasn't "destroyed consumption," says Levkovich, who cites two main reasons.

First, the average worker earns a median income of $45,000 per year, the strategist says. At that level, a standard 3% to 4% wage increase offsets rising energy prices, even if the person "doesn't have much left over" for discretionary spending.

Second, "the 20% of American income-earners account for 40% of consumer spending, or more than five times the bottom quintile," Levkovich says. "The upper-end consumer owns stock [in greater proportion than the average American] and the 'wealth effect' is more-than offsetting the bite of energy."

This in turn helps explain why high-end retailers like Saks (SKS Quote) and Nordstrom (JWN Quote) continue to outperform.