The week prior to the Memorial Day weekend saw a decline of more than 2 percent in major indices, and the economic fall-out resulting from rising energy prices continued to be a major issue. Oil prices rose to a record $135 a barrel before declining to $130.81 during this time period, and energy cost related news— including American Airlines’ plans to cut service routes and eliminate jobs, as well as adding baggage fees to offset the soaring cost of fuel—captured the headlines. As Memorial Day and the “official” start of the summer season beckoned, news stories and paid advertisements provided a slew of money- saving holiday and travel tips for budget-minded consumers. If we had any doubt before, it is clear that frugality is now in vogue.
Consumers’ concerns with oil prices and their impact on the overall economy are shared by Wall Street. Interestingly, despite the battering that stocks took the week of May 19, stocks are well above the lows posted in mid-March, and the Dow was 7.5 percent higher than its March low when investors were consumed with concerns about the credit markets. The difference between now and then is that concerns have now spread beyond the financial sector to embrace the overall economy. The spike in oil prices has continued to fuel inflation fears. Consumers are worried about rising prices across the board but especially for food, staples and gasoline. Investors worry that consumers faced with escalating prices will cut back on spending wherever they can. With these conditions in play, investment experts predict that the markets will remain jittery and that gains when they occur will be modest.
What advice are the pundits sharing with their clients? Opinions vary but there are some common refrains:
No one can predict when stocks will rally, but every one knows that a shift in sentiment will happen, and stocks will climb back again. History shows that in the last 50 years-- with only one exception—that when the Federal Reserve cuts interest rates, gains kick in during the following year. The bottom line: Nothing beats a steady approach, a diversified portfolio, and patience.