Goldman Sachs: High Oil Won't Kill Stocks

Global growth can withstand petroleum price spikes, analysis says.

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Both the American and global economies have been amazingly resilient despite the surge in oil prices. And that is good news for stocks, according to investment firm Goldman Sachs:

Over the past few months, investor concern has shifted from the risk of a financial meltdown to the risk that the global economy will succumb to stagflation in the wake of soaring commodity prices.... However, our econometric estimates suggest that very little of the weakness in equities can be attributed to either lower earnings views in response to higher oil prices or higher real interest rates. Rather, the bulk of the negative correlation between oil and equities can be explained by the fact that risk aversion tends to increase when oil prices rise. This suggests that fading oil price increases by buying equities can generate profitable trading opportunities. More broadly, past oil spikes have tended to usher in bear markets for equities only when accompanied by a significant decline in economic growth and rising inflation. In the current environment, our baseline scenario sees global inflation peaking in the third quarter of this year, and for global growth to exceed its 25-year average in 2008 and 2009. While this does not mean that equities will necessarily rally from here, it does mean that higher oil prices are unlikely to trigger a deep sell-off in global stock markets.