Why Stocks Aren't Fretting Over Rising Oil

The Dow Jones Industrial Average and S&P 500 pushed deeper into record territory early Monday as crude prices lifted above $74.30 per barrel. The stock market gains then faded in the afternoon as crude retreated, before finally settling 22 cents higher at $74.15.

Judging by what you read and hear in the financial press, this kind of symbiotic action is either impossible or inexplicable and certainly unusual. But the facts say otherwise, and recent history suggests the conventional wisdom is dead wrong regarding energy's effect, or lack thereof, on the stock market.

For months on The Real Story podcast and the past two weeks in the TheStreet.com's "What a Week" column, I have discussed how higher energy prices are not necessarily a negative for the stock market and even have some positive implications. The short answer is that energy stocks are having a bigger influence on the major averages while strength in the underlying commodity reflects a robust global economy -- facts seemingly lost on most reporters.

"Even though it's been negative for consumer spending, higher oil prices have clearly not derailed the stock market," says Howard Simons, strategist at Bianco Research in Chicago and RealMoney.com contributor. "Crude is being pulled higher by strong economic growth -- if corporations can buy crude for $1 and can produce $1.10 in economic value, it's not a negative."

Simons also notes something seemingly lost in a lot of the coverage -- including Saturday's Wall Street Journal story in which he was quoted essentially refuting the thesis of a piece entitled "In a Rare Pairing, Blue Chips and Oil Climb Together." Crude prices have been in a bull market since 1999 -- save for immediately after the Sept. 11 terror attacks -- but have not slowed the stock market's robust advance since its bottom in late 2002/early 2003.

"There's a powerful statistical correlation that the sectors that get helped by higher energy prices have greatly outweighed the negative impact spread over a much larger group of stocks, chiefly in consumer discretionary," says Simons, who detailed these relationships in a RealMoney.com column back in May. (RealMoney.com subscription required.)

In other words, for every struggling retailer like Sears Holdings (SHLD Quote), Home Depot (HD Quote) and Circuit City(CC Quote) there are energy stocks like Exxon Mobil (XOM Quote), Chevron (CVX Quote) and ConocoPhillips (COP Quote), which are having a greater, positive influence on blue-chip averages.

The rising long-term significance of energy stocks such as within the S&P 500 can be seen in the chart below. In the short term, Monday's session saw energy stocks as the biggest drags on the index, which closed down 0.2% at 1,549.52 after trading as high as 1555.90 intraday.

Source: Natexis Blechroeder