A barrel of oil bounced to over $60 Thu, which triggered a steep sell-off in the stock market Thu and Fri, although oil pulled-back to around $59 a barrel, and closed at $59.84 a barrel Fri.There are many reasons why oil prices are high, including a "price premium" for potentially negative geopolitical events, the start of the hurricane season Jun 1st (which may affect refineries in the Gulf), the 4th of July holiday (which is the start of the summer driving season), and end-of-the quarter window dressing (which may keep oil prices and oil stocks high). However, the most influencial factor is stronger than expected global economic growth. Both U.S. monetary and fiscal policies remain stimulative, and the global economy continues to expand at above trend growth. Moreover, financial markets have not slowed the global economy through negative "Wealth Effects."The price of oil has a weaker influence on U.S. producers, because the U.S. economy has become lighter (for example, the products Microsoft produces weigh little). Nonetheless, high oil prices will have some negative effect on earnings, particularly producers of heavy products (e.g. in China, which is moving from the Agricultural Revolution into the Industrial Revolution, while the U.S. is moving from the Information Revolution into the Biotech Revolution). Also, U.S. productivity growth is slowing, which is negative for earnings. On the consumption side, a higher oil price is a tax, because consumers substitute other products for higher priced oil products. So, demand or prices for other goods fall. Consequently, a higher oil price will slow output growth and lower living standards rather than cause inflation.The four charts below are same period daily charts of SPX (S&P 500), OEX (S&P 100), OIH (oil stocks index), and TLT (long bond ETF). SPX (the largest 500 stocks) has outperformed OEX (the largest 100 stocks) for several years. Currently, OEX is relatively undervalued compared to SPX. The four charts show the general stock market (i.e. SPX and OEX) OIH, and TLT generally rallied together recently. However, they may move in different directions over the next few weeks.The first chart shows SPX fell to the congestion area (circle), which is a major short-term support area.
