US stocks this month dropped to their lows for the year as crude-oil prices surged to records. William Hummer is betting that both these trends are about to reverse themselves.
Concern will dissipate in the next two months about possible disruptions in oil supplies from war, terrorism and political disputes, said Hummer, chief economist at Wayne Hummer Investments LLC. The resulting decline in crude will lift share prices by 15 percent by the end of the year, he said.
"The market is being held hostage by oil prices," said Hummer, who helps manage US$1.5 billion for the Chicago-based firm. His outlook on oil: "The bubble will break."
Last week's stock-market performance suggests other investors share his view. The Standard & Poor's 500 Index rose 3.2 percent, its biggest gain in 10 months, to 1098.35 even as oil prices reached records every day. Delta Air Lines Inc and retailers such as Home Depot Inc. and Best Buy Co led the gain.
The Dow Jones Industrial Average recorded its best weekly performance since May 2003 by rising 2.9 percent to 10,110.14. The Nasdaq Composite added 4.6 percent to 1838.02.
Stocks rallied even as concern that clashes in Iraq may disrupt the country's oil exports boosted crude prices. Oil for September delivery climbed to a record closing high of US$48.70 a barrel in New York on Thursday. The contract peaked at US$49 on Friday before dropping 1.7 percent.
Crude has risen 47 percent this year, prompting forecasts that higher energy costs would curtail spending on other goods and services, slowing the economy and crimping profit growth.
Ethan Harris and Joseph Abate, economists at Lehman Brothers Inc, last week lowered their forecasts for economic growth for the second time in a week. They cited the surge in oil prices.
The S&P 500 reached this year's low on Aug. 12 at 1063.23, down 4.4 percent for the year. Analysts lowered profit estimates for next year, according to Thomson Financial. They now predict 9.9 percent growth on average for S&P 500 companies, down from 10.6 percent on July 1.
Ups and Downs
Stocks have generally fallen this quarter on days that oil prices have risen, and rebounded when crude has slipped.
The S&P 500 has an inverse correlation of 0.7 with crude-oil futures in New York, Bloomberg data shows. The nearer the number is to one, the closer the relationship between the two. The figure rises to 0.74 when tracked from March 11, the day that bombs set in Spain killed more than 190 people and rekindled worldwide terrorism fears.
The correlation last year was 0.33, signaling that crude's moves had much less to do with stocks' performance. Oil gained 4.2 percent for the year as the S&P 500 jumped 26 percent.
Terrorism fears brought about by conflict in Iraq and events such as the US political conventions and the Athens Olympics have added US$10 to US$15 a barrel to the price of oil, said James Paulsen, the chief investment strategist at Wells Capital Management.
"I would argue that market action this year is tied to terror fears, rather than fundamentals," said Paulsen, who oversees US$125 billion in Minneapolis. "The reason there is a high correlation between oil and the stock market is because oil spikes when terrorism fears spike."
Stocks are 15 percent undervalued, Paulsen said.
Hummer said he expects oil prices to decline at the start of September, when the Republican convention ends and summer-vacation demand for gasoline in the US weakens. Crude futures may drop as low as US$40 a barrel, he said.
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