Oil Goes from Tailwind to Headwind

In most economic cycles, commodities rally very late in the business cycle, and often oil doubles in price before downturns.  Our leading economic indicators are not forecasting an immediate economic downturn, but we are very definitely late cycle on a lot of metrics.  Interestingly, oil has now rallied over 100%, much as it did in 1990, 2000, and 2008.

Most investors are familiar with the negative impacts of oil on the consumer, but they are less familiar with the role of oil on price to earnings multiples.  The relationship is not perfect and there are some deviations, but overall, higher oil prices lead to lower P/E multiples and lower oil prices lead to higher P/E multiples.  The sharp increase in the price of oil will be a headwind (please click chart to enlarge).