Are Low Oil Prices Bad for the Stock Market?

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By Jacob Maslow

dollar sign and oilIn the past few weeks, there’s been a growing correlation between the price of oil and the Dow Jones Industrial Average and the other stock indices. It seems that when the price of oil dips, so does the stock market. This begs the question: Is there a direct correlation between these two pricing mechanisms? After all, these are both economic signals that reflect broader economic realities.

The price of oil reflects both the amount of supply as well as global demand. As I’ve mentioned in a previous article, the main reason why the price of oil continues to slide is not due to supply. In fact, we’ve had high supply scenarios in the past. What’s missing is red-hot demand. If the global economy is humming along at an optimal level, much of that supply would be soaked up and the global price of oil would be firm. Unfortunately, that’s not the case.

This is why I believe that the price of oil tends to match sinking stock prices. They’re both indicators of the overall health of the global economy. Besides the glowing exception of the US economy, the rest of the globe isn’t doing so hot. Japan is still grappling with deflation and has only shown recent signs of improvement. Europe, on the other hand, is in the grips of deflation and economic stagnation.

In view of the total picture of the globe’s economic health, it appears that there are not enough economic activity and demand to boost the price of oil. Since stock pricing is a reflection of economic health, it is no surprise that when the price of oil dips, the stock pricing dips as well. Again, it’s all about viewing these as signals of larger processes. It’s all about looking at these indicators as proxies of economic trends that translate to corporate earnings.

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