Lower oil prices are supposed to be good for the economy and stock market because they provide consumers and businesses with more money to spend. But since early November, oil prices and stocks have been moving lower in lockstep, and there’s no telling yet when that might end.
Year-to-date the S&P 500 is down 7% while oil prices have fallen 17.%.
“At this point oil is a one-stop shop indicator for stock prices,” says Nick Colas, chief market strategist at Convergex. “That’s frustrating. It’s almost like we’re beholden to this one commodity.”
More specifically the stock market has been “treating the plunge in oil prices as an indicator of global growth,” says Russ Koesterich, global chief investment strategist at BlackRock. “That’s wrong. Oil is a cyclical commodity. The problem is not [global] demand. The problem is supply.”
If that’s the case, the plunge in oil will end only when and if producers like Saudi Arabia and Russia slow production, but there’s no sign of that happening yet.
If, instead, the plunge in oil prices is a signal of a continuing global slowdown, and possibly recession, the decline will continue, dragging stocks down with it.
But there are other analyses, which are not as damaging for the broader stock market.
“Deteriorating sentiment rather than actual fundamentals “are driving stock prices lower,” says Koesterich.
Jim Bianco, president of Chicago-based Bianco Research, said, “Crude oil has become a credit event as opposed to a consumer event…a big credit event the financial sector has to deal with. … Banks lent the energy patch billions of dollars and at $31.50 per barrel of crude many are not getting their money back… At around $30 or lower a barrel there will not be residual value left” for many oil companies.
That credit analysis may explain in part why the KBW Bank index is down more than 16% year to date while the SPDR S&P Oil and Gas Exploration & Production ETF (XOP) is off 12.26% and why the broader market indexes keep falling. Financial companies make up 16% of the S&P 500; energy stocks just 6.6%.