Surging oil prices won't drive stagflation in the US but investors should focus on 'snapping up' quality stocks in 5 key sectors, Morgan Stanley says

Surging oil prices won't drive stagflation in the US but investors should focus on 'snapping up' quality stocks in 5 key sectors, Morgan Stanley says
Gas and diesel fuel prices are more than $5 a gallon throughout California.FREDERIC J. BROWN / Contributor / Getty Images
  • The parabolic move in oil prices is fueling stagflation fears but they remain off inflation-adjusted highs, Morgan Stanley said Monday.
  • The US economy is "resilient" with a solid labor market and up to $2 trillion in excess savings by Americans.

The recent surge in oil prices is "historically stunning," but the US economy is strong enough to withstand the subsequent jump in gas prices, Morgan Stanley said Monday in recommending investors selectively pick stocks across a handful of specific sectors.

West Texas Intermediate crude oil and Brent crude prices have moved off 2022 highs but they shot up roughly 40% after Russia, the world's third-largest oil producer, launched its war against Ukraine nearly three weeks ago. The higher moves have fed into US gas prices, drawing the national average for gas prices to $4.32 a gallon on Monday, according to Triple-A.

"While rising gasoline and food prices are a painful tax on consumers and crowds out other discretionary spending, we believe the US economy is resilient because of the strong labor market, rising real disposable income, excess household savings and ample credit capacity," wrote Lisa Shalett, chief investment officer at Morgan Stanley, in a note Monday aimed at putting oil prices in perspective.

Investors should "consider selectively snapping up quality companies that have reasonable valuation support. Focus on financials, energy, industrials, health care and consumer services," said Shalett.

There's at least an estimated $1.5 trillion to $2 trillion in savings via individual bank deposits and money market funds, the bank noted.


The sticker stock of oil and food prices at a time that US inflation is at a 40-year high has raised questions about stagflation and even recession, and those fears have in part appeared in the "collapsing" 2-year/10-year US Treasury yield curve. About a third of US economic activity is driven by consumers.

However, "gasoline's share of the consumer's wallet is 60% lower than it was in the 1980s and is roughly half what it was at the last oil price highs in 2006-2008," said Shalett. The 1980 oil price shock followed the start of the Iran–Iraq War as Iranian oil production dropped.

"Adjusted for inflation, oil is still well below where it was in prior crises. Furthermore, the US now has the capacity to be energy independent," she wrote.

The mix of the war in Ukraine and concerns about pain at the pump for millions of Americans and businesses has contributed to driving the S&P 500 further into a correction and the Nasdaq Composite into a bear market as had lost more than 20% from its November high.

Morgan Stanley said its Global Investment Committee acknowledges how the Russia-Ukraine war supply shock affects the global economy. "[But] we are far from calling for a recession in the US. To the contrary, we see pockets of strength and resilience that are producing investment opportunities."