Yesterday I saw a bunch of Bloomberg headlines regarding a new U.S. National Intelligence Estimate (NIE). I parsed through them quickly and made little of it; until, that is, I read an eye-opening piece last night. The bottom line is that the Dec. 3 NIE concluded that Iran halted its nuclear weapon program in 2003, and that since 2005 the U.S. has been overestimating Iran’s plans to develop nuclear weapons.
And with that, the oft discussed “geopolitical premium” presumed to be built into energy prices was pretty much eviscerated. What does it mean for energy stocks? What does it mean for the broader market? Based on recent (and not so recent) history, lower energy prices are not correlated with broad gains in equities, regardless of what the broad media feed us on a daily basis. You can search the archives for many statistical takes on this point, but merely eye-balling this 4-yr chart of crude and the S&P500 (SPX) it is rather obvious that the two have been dancing together quite nicely.
Does it mean then that equity markets will fall together with energy prices? All things being equal, I suspect that lower energy prices would indeed be a drag on equities; but things won’t be equal. The only thing keeping the Fed from mainlining the system with every dollar it can print is the risk of inflation. The mere thought that inflation might be restrained by lower energy prices should be excuse for Bennie to continue his compulsive monetary promiscuity. It matters not that, in my humble opinion, these actions will only prolong and exacerbate the current credit mess; if the Fed keeps printing, nominal asset prices will likely continue their delusional exuberance.
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