The Market And Oil Prices

by Alan Lavine and Gail Liberman

The stock market should do well if the price of oil declines.

That’s the word from William Wilby, director of equities at OppenheimerFunds Inc., New York. He says supply and demand factors are pointing to lower oil prices. Lower oil prices should translate into lower inflation and increased economic activity.

 Lower inflation also is good for bond prices. Reason: Bonds hold their purchasing power. “We do not think that oil prices will hold at their current levels for very long,” Wilby said. “Moreover, we are perhaps in the early stages of a minor oil-induced slowdown in world growth, which could take some of the upward pressure off interest rates. This could bode well for stock prices over the next six to nine months.”

Although oil stocks may do well, the overall stock market could be sluggish, says David Wyss, chief economist at Standard & Poor’s, New York. Wyss, who spoke at a recent Fidelity Investments conference in Palm Beach, Fla., said we could see single-digit returns in the stock market for some time. Reasons: Higher interest rates, high oil prices, a huge U.S. government deficit and a weak dollar.

Overall, the economy is growing due to strong productivity, he said. As a result, inflation should not present a major problem for investors.

Robert Doll, chief investment officer at Merrill Lynch, New York, said that economic growth is slowing. But slowing growth should keep interest rates from rising too high.

What if you want higher yields? The higher the yield, the greater the risk. Today you can invest in preferred stocks that yield more than 7 percent. But preferred stock is considered riskier than bonds because bondholders have collateral backing their bonds. On the other hand, if a company defaults, preferred stockholders get paid their dividends before common stockholders.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.