The consensus among financial analysts is that high oil prices tend to depress the market. There are a number of practical reasons for this relationship, including increased costs for shipping, travel, and electricity. But aside from these direct impediments to the economy, high oil prices also appear to have a negative effect on investor optimism, which in turn can hurt the equity markets.
According to the August 2004 UBS/Â鶹´«Ã½AV Index of Investor Optimism survey*, 42% of U.S. investors report that gas prices have caused at least some financial hardship in their households (see "Investment Climate Getting Pinched at the Pump" in Related Items). As might be expected, investors who say they've experienced hardship as a result of high gas prices tend to have lower incomes and fewer dollars invested than investors who haven't experienced hardship. Those who have suffered hardship are also far less optimistic about the economy than investors who haven't. Investors who have suffered because of gas prices score a 28 on the Index, while those who haven't suffered score 85 points higher at 113.
Even when differences by annual household income and level of investment are controlled -- that is, when we look within each of the demographic groups in these categories -- investors who say they have experienced hardship because of gas prices are much less optimistic about the U.S. economy than those who haven't. Aggregated responses from investor optimism surveys in May and August 2004 show that within each income and asset category, those suffering hardship score significantly lower on the optimism scale than those who haven't suffered hardship.
The Future of Gas Prices
Is there any relief in sight? While a plurality of investors feel that gas prices will remain about the same over the next six months, the outlook is tilted more toward rising prices than declining ones.
If gas prices do rise, along with the percentage of investors experiencing some financial hardship, then optimism will likely shrink as well. This is underscored by the finding that more than 6 in 10 investors say the price of fuel is "hurting the investment climate a lot." Any decline in gas prices would be welcome not only by consumers, but by investors as well. Relief from higher prices would likely lead to higher investor optimism and a healthier equity market.
*Results are based on telephone interviews with 804 investors, aged 18 and older, conducted in August 2004. For results based on the entire sample, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.
