THE RATE OF CHANGE IN THE PRICE OF OIL IS MORE IMPORTANT THAN THE ACTUAL PRICE

As mentioned in today's update, history shows that equity markets usually decline if the price of oil rises by more than 80% in one year. It has therefore been very interesting to observe that consumer behavior did not change much as oil rose over the psychological level of $100 per barrel. However, now that the price of oil has risen over $120 per barrel, it is having a significant impact for businesses and finally changing the driving habits of consumers. An 80% increase from the average price last June is $121 per barrel. This validates the premise that an 80% increase in one year causes problems in the economy and equity markets. Major changes in prices over a short time always make it very difficult for businesses to adjust.

Bear markets started in 1981, 1987, and 2000 when the price of oil increased more than 80% after equities had long up trends. That is not the case now. In 1991, oil spike for only a few months after Iraq invaded Kuwait, which resulted in a 20% decline for equities that was reversed a few months later. In 1974, the US was already in a severe recession caused by wave and price controls to combat inflation, problems in the Vietnam War and Nixon/Watergate scandal, and a 260% rise in oil prices. The SP 500 declined 10% in the first 10 months of 1973 but the TSX was still near all-time highs. In the year following October 1973, the SP 500 fell another 44% while the TSX lost 36% to bottom in October 1974. Of all the previous occasions, the situation now seems closest to the environment in 1974.

It will be very important to see how oil, equities, and the trend charts react in the weeks ahead.