Groundhog Rally

Another run-of-the-mill rally off the back of falling oil prices, by now a very familiar sight. While not unexpected (see yesterday's post, previous posts on this site re:oil prices), I still have some issues with how many times the market has rallied this year in response to oil price slides of varying degrees. The run-up in oil prices the past few years has not hampered the growth in corporate profits, and there have been as many explanations for this as there have been oil-based rallies - the US economy operates using far less oil per unit of output than 10 years ago, we live in a service-based economy and oil price spikes are a concern for developing countries that are newly industrialized...you get the picture.

So when oil futures drop off (in a predictable manner), shouldn't the reverse be true? Why should we anticipate that a slide in the price of oil would stimulate/stabilize profit growth? Especially in the immediate future - if the effects of oil price increases operate on a lag, shouldn't the same lag delay any expected benefits from falling oil prices?

The only immediate impact of oil's price is reduced gas prices at the pump, which I don't feel will have the consumption-inducing effect the market is hoping for. I felt that $60 oil would push the market to test its highs, and at $64 and the DJ at 11500 I feel even more confident that will be the case if oil gets that low, and I just don't think it is a rally that has staying power.

In more general news, this morning's WSJ notes that global fund managers' outlook for corporate profits has fallen to lows not seen since 2001. That doesn't mean they are bearish, however, as the same segment also notes increased optimism regarding the global equity outlook. So...defensive sectors are leading the way, but triple-digit rallies come on the back of oil price news. This market is semi-schizophrenic and the tension has investors looking for love in all the wrong places.