The U.S. economy is about to meet its worst enemy head-on — the surging energy prices that experts believe are right about at the point where they will forestall any further recovery.
As gasoline nears $4 a gallon nationwide, most experts agree that energy prices probably are at the point where consumers will begin to retrench and start to slow the nascent economic recovery.
The good news is that the recoil likely will bring prices back down and allow the recovery, as well as the five-month stock market rally, to continue.
"The price of things that people have to buy are getting to the point that there's only one way that can end if people aren't making more," says Dan Greenhaus, chief global strategist at BTIG in New York. "If gas keeps going up at this pace you're going to get to a point fairly soon where demand destruction begins to occur."
The latest inflation numbersreleased Friday paint a mixed picture: Consumer prices rose 0.4 percent in February, but the main driver was energy, which surged 3.2 percent. Total consumer prices are up 2.9 percent year over year, but have risen 2.2 percent excluding food and energy, which is the measure that the Federal Reserve follows most closely. Also, real wages fell 0.3 percent for the month.
Gasoline prices, meanwhile, are at $3.83 a gallon for regular gas nationwide, a rise of eight cents just over the past week and 9 percent in the past month alone.
That has consumers afraid even as market veterans insist that the end is near for the oil rise once the marketplace realizes that consumers have reached their tolerance level.
"Assuming that the situation calms in the Middle East, the supply-demand curve does not suggest prices will stay where they are," says Michael Yoshikami, CEO and founder of Destination Wealth Management in San Francisco. "If they do it's going to eat into the recovery."
Expecting the saber-rattling over Iran's nuclear program to end soon may be a stretch, but Yoshikami believes an all-out military conflict is the only thing likely to derail a move lower in oil prices, which are little changed over the past 24 days despite trading within a volatile range.
"We're already at that price (where oil blocks a recovery). The question is whether these prices will be sustained," he says. "We hold the range as long as the uncertainty with Iran is front and center. Oil right now is probably about $15 to $20 a barrel higher than it should be given demand and supply."
Indeed, oil and stock prices have moved in lockstep during the market's rally.
Both began a precipitous rise in early October, and both have been locked into a tight range over the past several weeks. The situation, in fact, was largely the same when oil hit its all-time high in July 2008 at $147 a barrel. The stock market and energy began a steep fall together before starting a recovery in March 2009.
"The rally remains intact because corporate health hasn't been this strong in years," Yoshikami says. "Likewise, the global recovery is real so therefore the rally is in fact intact. We might be getting in a range, but we see the market higher going forward to the end of the year."
Others share that opinion: Credit Suisse became the latest house to take up its market projection, putting a 1,470 price target on the Standard & Poor's 500 this year, up from 1,400.
In fact, equity analyst Anthony Goldthwaite said oil could rise all the way to $150 a barrel (43 percent from here) and headline inflation to 4 percent from the current 2.9 percent before causing a serious threat. Goldthwaite points out that other commodity prices have remained low — the Friday CPI report indicated flat food prices — while even speculators, gauging by forward oil contracts, "believe that any rise in the oil price is temporary."
Given the Federal Reserve remains in full-easing mode — Bank of America Merrill Lynch economists say the central bank's "dovish bias still in place" — such bets against inflation seem risky, albeit popular at this point.
Shoppers and drivers have been battered with high prices, and consumer stocks are among the worst-performing S&P sectors.
"If things continue at this pace, it's going to be tough on consumers, which is going to hurt the discretionary sector," BTIG's Greenhaus says. "But the discretionary sector is a small part of the market, so the direct relationship is not as negative as you might expect. Clearly, there's a point where the economy slows down if gas and oil prices continue doing what they've been doing."