Stocks are trading at record highs, but one investing pro says that oil market history is flashing warning signs of what’s next for equities.
Investors are looking through the ongoing conflict in the Middle East, expecting a peace agreement from the US and Iran any day now. Jim Paulsen, a veteran market strategist with decades of experience on Wall Street said that history suggests that stock pressure ensues after oil prices peak.
“While not expecting a bear market this year, I wouldn’t be surprised by another S&P 500 selloff before a rally closes out the year near where we are today,” Paulsen wrote in a Tuesday note.
He said that the expects investor relief from an eventual deal could be “a telltale contrarian sign” that the next move in stocks is down.
The market vet called out another old investing maxim, “buy on the cannons, sell on the trumpets,” which describes buying sell-offs during the war then selling the news once a peace deal is solidified.
“Today’s situation may be less about war than it is about oil prices. But the ‘cannons trumpets’ may still provide investors sound advice for the balance of this year,” he noted.
Paulsen examined historic oil price performance since 1970, flagging 10 major spikes, and then compared them to stock market performance during the same period.
“In every case since 1970, once a major rise in oil prices peaked, the S&P 500 did suffer a period of turmoil,” the strategist said.
“Sometimes a bear market occurred and at other times once oil prices quit rising, the stock market simply trended sideways and struggled for a period,” he explained.
Paulsen’s analysis of past oil and equity markets performance raised the question: “Why has the stock market historically done so poorly despite the trumpets giving an all clear for oil prices?”
The strategist said it goes back to the mounting pressures facing the economy and stock market.
“After obsessing about how rising oil prices would derail the bull market ever since the cannons sounded, most investors relax and become much more optimistic once oil prices peak — a telltale contrarian sign.”
He outlined that as the conflict is resolved, the delayed economic impact of the war is just kicking off. “Consider how much restrictive economic forces have been intensifying since the cannons sounded,” Paulsen wrote.
Oil prices are trading below the peaks seen during the war in Iran, but are still well above prewar levels.
The oil price spike has sent gas prices soaring, tanking consumer confidence and fueling inflation worries. In response, US Treasury yields have surged and the market has repriced its expectations for rate cuts fro the Federal Reserve.
