It was a rocky start for commodities in 2007, and oil was no exception. Crude prices fell precipitously in the first few weeks of January, scoring a 19-month low at around $50 per barrel, before rebounding after OPEC announced a number of production cutbacks.
Although the Treasury market followed energy prices lower throughout the month, that correlation isn't likely to continue indefinitely. If commodities keep declining in price, inflation pressure will subside, a view that the Fed expressed in its policy statement released January 31.
A combination of stifled inflation anxiety and solid economic growth is as good as it gets for investors. However, it should be noted that any deviation from the good news that market participants have gotten so used to expecting could result in a painful correction in the equities markets. In that scenario, fixed income will likely prove to be an effective portfolio stabilizer.
