What to Do When Oil Swings

By BEN LEVISOHN – The Wall Street Journal – July, 2012

The relationship between stocks and oil prices might be breaking down—but its impact is still being felt in two key sectors. Experts say investors who play those sectors smartly can benefit regardless of where oil prices go from here.

Crude gained 4.7% on July 2, as Iran tested missiles capable of hitting U.S. targets in the Middle East. That price jump, coupled with a 9.4% surge on June 29, capped a nearly 13% rise in just three days of trading, the largest such move since August 2009.

The spike was quite a turnaround from the first half of 2012, when crude shed about 14% of its value, its worst first-half performance since 1998.

But the broad stock market hasn't been following oil's lead. The Standard & Poor's 500-stock index has moved in the same direction as oil in just two of the first six months of 2012, after doing so in 75% of the months from the stock market's bottom in March 2009 through the end of 2011.

"People think of oil and stocks as moving together," says David Kelly, chief global strategist at J.P. Morgan Funds. "But it's a relatively recent phenomenon to think they should move in the same direction."

According to research from Adam Parker, chief U.S. equity strategist at Morgan Stanley, earnings for just two sectors—energy and consumer discretionary—are significantly affected by oil-price movements. Energy stocks receive a boost from higher oil prices, while consumer-discretionary stocks benefit when prices fall.

J.P. Morgan's Mr. Kelly says investors looking to bet on stocks that will benefit from cheaper oil should consider consumer stocks. "If you're not spending money on gasoline, it helps with your spending power," he says.

Consumers may have more to spend with oil prices low. Last year, they took an $80 billion hit from rising oil prices, something that won't occur in 2012 if estimates for lower oil prices from the Energy Information Administration prove accurate, according to Aram Rubinson, a retail analyst at Nomura Securities International.