It used to be the case that the US stock market would respond favorably when the price of oil sinks. After all, what’s not to like? When the price of oil is lower, the hope is that consumers enjoy what would amount to a virtual tax break. Instead of spending hundreds of dollars a year on oil, consumers can spend that money on other products and services, which would then stimulate the broader economy.
Well, this was the old thinking. Now, just judging by the stock market’s recent performance, it’s beginning to track the price of oil. What this means is that the stock market is beginning to realize that the price of oil is really a gauge for the overall health of the global economy.
While everybody can agree that the US economy is a standout exception among a sea of doom and gloom, the broader economic outlook for the world is far from certain. China is slowing down. Europe is slowing down so bad that it had to borrow a page from the US Federal Reserve and engage in 1.1 trillion euro quantitative easing program. Japan already has its own quantitative easing program underway. The rest of the world is not doing well, and this explains for the large part the depressed price of oil.
Let’s face it, supply is not the problem. Even if the US and the Saudi Arabia were flooding the market with oil, if global economic growth was red-hot, that oil will be snapped up and bought and there will be a strong upward pressure on price. It’s all about demand.
It’s beginning to become clear that the stock market will continue to track the price of oil. So if you see downward pressures on the price of oil, expect downward pressures on the broader equities market as well.