I was blowing soap bubbles last weekend for my two toddler grandsons when I remarked to them: “See kids? All bubbles look alike.”

The inadvertent investment wisdom of that remark hit me this morning, as I observed the rally in the energy patch. The dynamics of the energy market currently look like the oil bubble of 2008.

Energy prices continued their upward march today, with some analysts predicting that crude will exceed $100 per barrel this year. As I’ll explain, the energy bulls should be careful what they wish for.

Wall Street mostly fell today but energy moved in the opposite direction. The Dow Jones Industrial Average and S&P 500 closed in the red, on escalating trade tensions and apprehension over interest rates. The Nasdaq eked out a modest gain. The Energy Select Sector SPDR ETF (XLE) rose 0.60%.

Helping place a floor under stocks was good news today from the Consumer Board, which reported that consumer confidence rose in September, posting its highest level in about 18 years.

The Consumer Board’s index increased to 138.4 this month from 134.7 in August. Analysts had expected consumer confidence to fall to 132. Declining unemployment and strong economic growth are keeping consumers in an upbeat mood. That may change, though, as they start to feel the effects of higher interest rates.

The Federal Reserve’s two-day meeting started Tuesday, with an announcement of another interest rate hike expected tomorrow. U.S. government debt yields continued rising today, with the benchmark 10-year Treasury note topping 3.09%. Higher rates hit consumers in their wallets and could choke the economic expansion.

But energy investors remain cheered by OPEC’s rebuff last Sunday of President Trump’s demand to throw open the production spigots to curb oil prices.

Crude oil prices climbed for the second straight day Tuesday, reaching a four-year high. Supply is diminishing, amid outages in Iran and Venezuela, the refusal of OPEC and Russia to boost output, and bottlenecks in the U.S. shale patch. Imminent U.S. sanctions against Iran should also curtail supply.

West Texas Intermediate rose 0.28% today to close at $72.28/bbl. Brent North Sea crude rose 0.76% to close at $81.14/bbl.

As the chart shows, oil prices are in the midst of a powerful ascent (prices as of market close Tuesday):

 2008 all over again?

Bank of America Merrill Lynch predicts that oil prices will hit $100/bbl by the end of 2018, a level not seen since 2014. That could set us up for a repeat of 2008, when oil crested to historic highs of $144.29/bbl in July 2008 and crashed to $33.87/bbl five months later. Global stocks crashed in tandem.

The trigger for another 2008-style contagion could be emerging markets. Economic and currency woes, as well as onerous debt levels, are plaguing countries such as Turkey, Argentina, Indonesia, and Brazil. Most future projected oil demand comes from emerging markets. If they stumble, it will reduce their oil consumption and dampen prices.

Oil prices usually trade inversely to the dollar, because crude prices are dollar-denominated and a stronger dollar makes oil more expensive for much of the world.

But this year, the dollar and oil have been climbing together, which increases the pain for oil consumers. Rising interest rates further strengthen the dollar.

The trade war is another threat. A Chinese official asserted Tuesday it’s difficult to proceed with trade talks while the White House puts “a knife to China’s neck.” U.S. tariffs on $200 billion worth of Chinese goods and retaliatory tariffs by Beijing on $60 billion worth of U.S. products took effect yesterday.

Trump today attacked Chinese trade policies in his speech at the United Nations. As I’ve repeatedly warned you, don’t expect this trade war to end anytime soon. During Trump’s speech, world leaders derisively laughed when he boasted of his administration’s accomplishments. Goodwill among global trading partners is in short supply.

Talks continue to stall over revamping the North American Free Trade Agreement (NAFTA). Canadian Prime Minister Justin Trudeau said today that his country might be able to work with a bilateral deal already agreed to by the U.S. and Mexico. Trump has threatened to leave Canada out. But even if a trilateral deal is hammered out, it still has to get through Congress.

The upshot: a “perfect storm” could be brewing for a global stock contagion. The ingredients are rising interest rates, a strengthening dollar, soaring crude prices, worsening trade tensions, emerging market weakness, and high equity valuations.

If oil prices do indeed breach $100/bbl, it could torpedo demand and trigger a sell-off in the energy patch, which would spill over into the broader stock market. We saw this happen in 2008.

Because remember, kids: all bubbles look alike.

Tuesday Market Wrap

• DJIA: 26,492.21 -69.84 (0.26%)
  
• S&P 500: 2,915.56 -3.81 (0.13%)
  
• Nasdaq: 8,007.47 +14.22 (0.18%)
  

Tuesday’s Big Gainers

• XO Group (NYSE: XOXO) +26.34%

Internet marketer to merge with wedding planning group.

• Intelsat (NYSE: I) +19.16

Analysts bullish on satellite operator.

• Jones Energy (NYSE: JONE) +6.44%

Rising oil and gas prices boost energy producer.

Tuesday’s Big Decliners

• Verastem (NSDQ: VSTM) -19.57%

FDA posts toxicity warnings for biotech’s blood cancer drug.

• Neogen (NSDQ: NEOG) -15.78%

Medical test kit maker misses on revenue.

• Vaccinex (NSDQ: VCNX) -5.21%

Analysts turn bearish on biotech firm’s potential.

Letters to the Editor

“My bank savings account still pays next to nothing in interest. My money market account with a fund family pays a pretty good dividend with less money. Time for a move. Maybe you could comment on where to park the cash for slow people like me? You stated you like bond funds.” — Michael M.

Mike, securities law prevents me from offering individualized investment advice. Generally speaking, short-term bonds are less vulnerable to interest rates than longer-term bonds. Also, don’t underestimate the appeal of certificates of deposit (CDs). As interest rates continue to rise, short-term CDs look attractive.

Questions or comments? I’m here to help: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.