High oil prices throwing
a wrench into investing

NEW YORK » Investors may feel the effects of high oil prices in their stock holdings as well as their fuel bills.

The latest spike in crude oil futures, which now hover above $56 per barrel, sent stocks tumbling this past week as investors, rightly so, feared that price hikes could soon ripple throughout the economy and trigger inflation.

Rising oil prices pressure every sector of the stock market, except for energy stocks. And if the Federal Reserve hikes interest rates more rapidly to combat the inflationary threat, economic pressures could also drive stocks lower.

The various scenarios leave few places for portfolios to hide. And sadly, hoarding Dubai crude futures isn't the answer.

"The first thing you have to wrestle with is whether this move higher in oil prices has persistence," said James Abate, investment director at GAM Fund Management Ltd. "You shouldn't do anything until you can find an answer that you can live with."

Barring any abrupt disruption of oil supplies -- a terrorist attack on oil facilities is one of the market's fears -- oil prices are likely to peak in the short term. Of course, the problem with the short term is that it could be anywhere from a week to six months away.

Some investors may want to jump into oil stocks, given their amazing track record over the past three months, even if it's just for the short term. The problem with that, analysts said, is that nobody knows when, or if, oil prices will come crashing down.

"It's the classic investor mistake," said John Lynch, chief market analyst at Evergreen Investments. "Just like the techs in 2000, everyone piles in right at the crest of the wave. I would be very, very careful about putting money into energy at this point."

Chad Cleaver, an energy analyst at Driehaus Capital Management, said there are other short-term energy opportunities besides the big oil conglomerates.

"I think that there's several ways investors can play energy without worrying about getting in at the top," Cleaver said. "There are exploration and production companies, which go out and explore for new oil and produce it. There's oil service companies that build and service the rigs and pipelines, the infrastructure. And there's alternative energy, which could be riskier, but has been getting a lot more publicity lately."

Beyond the question of energy stocks, however, the spike in oil prices doesn't bode well for the overall stock market.

"Oil stocks will likely outperform the stock market, but it's going to come at the expense at the rest of the stock market not doing so well," Abate said. "The higher oil costs are going to squeeze margins for businesses, and at this point, they can't pass on their costs to consumers because they're getting squeezed at the pump."

Abate noted that the Fed, which meets Tuesday, could try to stem the rise of oil by raising short-term interest rates beyond the quarter percentage point widely expected on Wall Street. The current benchmark rate stands at 2.5 percent.

However, that would create different pressures on the economy and the stock market. While such a move would strengthen the dollar and likely help oil prices fall on international markets, the increase in the cost of capital could slow the U.S. economy as businesses find it harder to borrow money.