Higher oil prices act as a tax on consumers in the form of higher gasoline prices. This is particularly true in the United States, where gasoline taxes are low and increases in crude translate fairly quickly into higher gasoline prices. To the extent gasoline prices rise, this typically comes at the expense of discretionary purchases. In the past categories such as apparel and restaurants have been quickly impacted by such spending cuts.
And as rising oil prices would be yet another brake on consumer spending in an environment in which many households are still living pay check to pay check, slowing spending could hurt the US and global recoveries. In addition, as evident in market performance earlier this week, the possibility of rising oil prices is a risk adding pressure on financial markets.
So where does this leave investors? As I’ve mentioned before, I expect that market volatility is going to pick up into the fall and based on this assumption, I advocate trimming some exposure to risky assets such as high yield bonds and parts of the equity market that look particularly extended year-to-date. In addition, I continue to suggest remaining cautious on sectors that rely on consumption such as the consumer discretionary and consumer staples sectors.