Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How the Bull Market Is Shrugging Off Rising Oil Prices
Transcript
- Lucas: The S&P 500 is sitting just above 7,400 as we record this on July 27th. That's a pretty gaudy number. But underneath that smooth surface, there's a commodity that's been getting a lot less attention — crude oil. Luna: Right, I've seen the headlines. Oil prices have been ripping higher, and that's actually starting to push up the odds of a Fed rate hike. Lucas: Exactly. The CME's FedWatch tool has been repricing rate hike odds higher this week, and the driving force is energy. West Texas Intermediate crude has gained something like 15 percent over the past month. Luna: And yet the market keeps climbing. That feels a bit contradictory. Lucas: It is, and that's exactly what I want to dig into today. The conventional wisdom says higher oil is a tax on consumers and a drag on corporate margins. But the market is waving it off. Luna: So the question is: is the market being complacent, or is there a genuine reason to be optimistic? Lucas: I think it's a bit of both, but leaning toward rational optimism. Let me explain. First, the economy is actually in decent shape — real GDP grew at an annualized 2.1 percent in the most recent quarter. That's not booming, but it's steady. Luna: So consumers and businesses might be able to absorb a bit of a commodity squeeze. Lucas: Right. And second, the energy sector itself becomes a bigger part of the market when oil rises. The S&P 500 energy weight has gone from around 2.5 percent to over 4 percent in the last year. Those companies' earnings go up. Luna: It's a natural hedge — higher oil boosts energy stocks, which helps offset the drag on other sectors. Lucas: Precisely. And the market seems to be betting that any Fed rate hike will be modest. The effective fed funds rate is at 3.63 percent right now, and it's been flat for weeks. Even with oil surging, the yield curve hasn't inverted further. Luna: That said, there are pockets of pain. The Russell 2000 is basically flat over the past five days, down 0.1 percent. Small caps tend to be more sensitive to energy costs. Lucas: That's a good point. And if oil keeps climbing, that's where the cracks could show first. But for now, the large-cap indices are shrugging it off. The Dow is near 52,000, the Nasdaq is over 24,900. Luna: I also wonder about the inflation expectations channel. If oil stays high, it could feed into core inflation, which might force the Fed's hand more aggressively. Lucas: That's the risk. The market is pricing in only a small chance of a hike at the next meeting, but the odds have doubled in the last week. If we get another hot CPI print, that calculus changes fast. Luna: So the bull market is essentially saying 'we trust the Fed will be patient.' It's a vote of confidence in Jerome Powell's willingness to look through transitory energy spikes. Lucas: And that's a bet that has worked so far. Look at 2022 — oil spiked, the Fed hiked aggressively, and markets sold off. This time, the Fed is already at a restrictive level, so they have room to wait. Luna: Plus, the oil price rise is partly supply-driven — OPEC+ cuts, geopolitical tensions. That's different from demand-pull inflation, which would be more worrying. Lucas: Exactly. The market is distinguishing between cost-push and demand-pull. For now, it's treating this as a supply shock that the economy can ride out. Luna: But let's not ignore the Moody's report last week — they flagged that AI spending could threaten credit quality at big tech. That's a separate risk, but it's lurking. Lucas: Sure, and Amazon, Alphabet, Meta are spending billions on data centers. But that's a long-term concern, not a near-term catalyst. The oil issue is more immediate. Luna: So the bull market is essentially a bet on a soft landing where oil is a nuisance, not a game-changer. Lucas: I'd frame it that way. And I think the data supports it so far. But if West Texas Intermediate crosses $90 a barrel, that narrative gets tested. Luna: We should probably mention that the energy-heavy sectors like materials and industrials are actually benefiting. It's not a uniform story. Lucas: Right, sector rotation is alive and well. Growth stocks have taken a breather, but value and energy are getting a bid. That's actually healthy for the market's breadth. Luna: I'd also note that the VIX is still relatively low, around 14. The market isn't pricing in panic. Lucas: Low volatility in the face of rising oil and rate hike talk — that tells you investors are comfortable. At least for now. Luna: So where do you see the biggest risk? If oil doesn't stop climbing, what's the tipping point? Lucas: I think the tipping point is if it starts showing up in consumer spending data. If retail sales weaken or jobless claims tick up, the market will start to price in more than just a token rate hike. Luna: That's a good lens. And the next CPI report is due in mid-August. That'll be a big data point. Lucas: Absolutely. For now, the bull market is riding momentum and a solid economic foundation. But oil is the wildcard. Luna: Before we wrap that thought — I want to say, if conversations like this help you think about the market differently, that's exactly the kind of thing listener support makes possible. Lucas: Yeah, we keep the show ad-free and rely on listeners who find value in it. If you'd like to support, you can head to buy me a coffee dot com slash fexingo. Luna: It's a small gesture, but it really helps us keep going. And we appreciate every bit of it. Lucas: Now back to oil — I think we need to watch the next Fed commentary. Any hawkish shift in language could accelerate the repricing. But for now, the bull market isn't blinking. Luna: I'll be watching that Russell 2000 for signs of stress. If small caps start to slide meaningfully, that'll be the first red flag. Lucas: Good call. And the next few weeks will tell us whether this is just a summer tempest or a real shift in the macro landscape. Thanks for digging into it with me, Luna. Luna: Always, Lucas. See you next time.