G7 Talks, Strategic Reserves, and Oil: My Prediction for the Next Catalyst for Markets

When seemingly good news is greeted as negative news on Wall Street, you need to start worrying. That’s exactly what happened when countries around the world agreed to release oil from their strategic reserves to quell concerns in the oil market. The decision ultimately resulted in higher oil prices. Here’s the next big catalyst I see, and there’s no way to avoid it.

You see high oil prices, but the data doesn’t

Consumers see high oil prices very quickly in the form of higher gas prices. However, those prices aren’t reflected in the inflation data being released right now because it’s backward-looking. Inflation came in as expected in February, but when the March data is released, the rate of inflation is likely to push higher due to the spike in oil prices.

Image source: Getty Images.

However, that’s not the end of the story. Oil and natural gas are vital to the world economy. They are used by utilities to generate power, by consumer staples companies to make and transport products, and even by farmers in food production. The full impact of rising oil and natural gas prices will take time to flow through the economy, which suggests that inflation could run hot for longer than many hope.

The market hates inflation

Research from The Motley Fool shows that inflation has historically averaged around 3.8% a year. But that’s an average; over short periods, it can rise materially above that figure. When inflation is above 5%, the S&P 500 index (^GSPC 0.61%) has returned only 2.4%.

My concern is that oil prices will lead to a lingering uptick in inflation numbers. That, in turn, will increase recession concerns among investors, if not tip the economy into one. And that could precipitate a bear market.

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SNPINDEX: ^GSPC

S&P 500 Index

Today’s Change

(-0.61%) $-40.43

Current Price

$6632.19

Key Data Points

Day’s Range

$6623.92 - $6733.30

52wk Range

$4835.04 - $7002.28

Volume

3B

Stocks are still trading near all-time highs, so that fear may seem out of line with the market reality. However, daily price swings have been quite large. That’s not a great sign for the future because it means investors are being driven by their own emotional swings. The big news right now is the ongoing geopolitical conflict.

If inflation rises because of high oil prices, as I expect, fear will increase, and investors will become even more skittish. That could easily lead the S&P 500 index into a deep downturn.

Don’t waste the opportunity

The time to prepare is now, before a bear market comes along. Create a wish list of stocks that you would like to own if only they were cheaper. That way, you’ll be prepared to buy while others, driven by fear, are selling. If the bear never materializes, the worst thing that happens is that you made a list of stocks that you won’t get to use.