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If oil stimulates the economy, why does the stock market trade lockstep with oil?

ghostofposterspast 8,460 1,535 January 11, 2016 at 11:48 AM
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Everyone says that low oil is a stimulus for the economy. Yet the stock market is trading lock step with the price of oil. When oil goes down, the stock market goes down. When oil goes up, the stock market goes up. If low oil is good for the economy why doesn't the stock market go up when oil goes down?

As an aside, one thing pushing down oil is the strong dollar. The dollar gets stronger when the yuan gets weaker. Lower oil means a lower stock market. So what the Chinese central bank does effects the US stock market directly on a day to day basis. We better pray that China rides out this rough patch quickly and effectively.

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#2
lower oil means also lower oil stocks and lots of job (good paying jobs) losses right here in the US. don't forget that domestic production requires relatively high oil prices to break even.
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#3
Lower oil prices can also be a sign of an impending recession although the circumstances now suggest an oversupply. Despite that, recent Chinese data is ugly so traders are basically dumping any risky asset, especially oil related and/or small cap related
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#4
The simplest answer is that neither one is the only factor driving the other. All else being equal, a moderate decrease in oil prices should stimulate parts of the economy, especially if oil prices were at a historically high level. A large decrease can cause disruption in one of the US's largest industries, which certainly can have a negative effect on the overall economy if a large number of people are laid off.

However, in the real world, it's often external factors driving both the stock market AND oil prices. When NK set off a nuke (real or fake), it sent chills into the market, causing stocks to fall a bit. If people think it could slow economic growth in China then oil demand (and prices) may fall as well. Or, if Saudi Arabia tested a nuke, the fears of chaos in an oil producing country could drive stocks down and oil way up.

It's a complex relationship between oil prices and the economy, and how that gets reflected in stock prices is another complex issue that just cannot be simplified into a single cause-and-effect event. Day to day, of course, the movements are usually pretty small and not necessarily based on any macroeconomic event at all.
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Quote from Dr. J View Post :
lower oil means also lower oil stocks and lots of job (good paying jobs) losses right here in the US. don't forget that domestic production requires relatively high oil prices to break even.
Which is only about 6% of the economy now. Which is too small to cause the overall stock market to track oil so closely as it does.
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Quote from dukeblue219 View Post :
It's a complex relationship between oil prices and the economy, and how that gets reflected in stock prices is another complex issue that just cannot be simplified into a single cause-and-effect event. Day to day, of course, the movements are usually pretty small and not necessarily based on any macroeconomic event at all.
I'm not talking about individual oil related stocks. I'm talking about the broader market as a whole. It tracks oil tick for tick now. Bring up today's chart of oil vs DOW/SP500/NASDAQ. They track each other tick for tick. Oil goes up in the morning, the DOW/SP500/NASDAQ go up. Oil falls midmorning, the DOW/SP500/NASDAQ fall. It's just not today. this has been the pattern all year. Wink
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#7
That relationship broke in late 2014 as oil tanked. So what if there are some daily or intraday correlations. The global economy doesn't function based on a vacuum.

You used to be able to "buy" the SPX for 15-20 barrels (so to speak) and now it will cost you 60 even with the recent market dip.
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#8
Also, the interesting thing about crude is there have been more contracts (futures) traded between $90-100 than basically all other prices combined. There was a HUGE amount of players, probably leveraged and not covered, in that price zone for years. Many I'm sure were adding long in 2008 at $100 after the 50% haircut off $150 and defending it till they no longer could. Once those bids dry up, down in flames she went. Who gives a rip about the headlines? It's all in the chart.

And just to boost my market efficacy a bit, I told the wife months ago to not worry about gas prices for the winter as the price had $28 written all over it. We're there now, well under the 2009 swing low. A nice monthly close below the 2003 lows at around $25 might just challenge the teens! Woot.
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Quote from Bania View Post :
We're there now, well under the 2009 swing low. A nice monthly close below the 2003 lows at around $25 might just challenge the teens! Woot.
Not woot for anyone with money in the stock market. The markets won't turn around until oil does. Today proved that again. We had every reason to go up today. Then oil turned and the rest of the market turned with it.

Not woot for me on gas prices either. The price of oil is down huge in the last year. Yet what I pay for gas is pretty much exactly what I paid a year ago, just shy of $3 for the cheap stuff. Well north of $3 for Shell/Exxon/Chevron.
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LOL. Just reported on CNBC. Some oil buyers are now bidding sub $0. That's right, less than $0. They want the oil producers to pay them to take oil off their hands.
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Quote from ghostofposterspast View Post :
Not woot for anyone with money in the stock market. The markets won't turn around until oil does. Today proved that again. We had every reason to go up today. Then oil turned and the rest of the market turned with it.

Not woot for me on gas prices either. The price of oil is down huge in the last year. Yet what I pay for gas is pretty much exactly what I paid a year ago, just shy of $3 for the cheap stuff. Well north of $3 for Shell/Exxon/Chevron.
Do you really thing this all about oil? Is oil really the key? I'm not sure I would say that. It would help, sure. But I don't think it is the key.

Here is my opinion of where I think we are: We are having a "profits recession" right now (I didn't make up that term--read it somewhere and I like it). Everything is stagnant. Little growth. 4Q 2015, the stock market was priced for more growth. Everyone had sensed a market peak for at least 3 quarters now and was anticipating a correction. Rate hike. China slows. Oil tanks. Correction hits. And now the stock market can't hold its gains when it opens positive. Why? Because the market is overpriced at our now-current growth outlook. Any short term pop is used by most to exit.

Where this goes from here? I think this depends on China. The health of China's economy has a huge impact on oil demand. And most of what we've been looking for in growth seems to come from Chinese exports. The morning market pop was supposedly optimism over potential China stimulus. That "rally" was doomed from the start. China hasn't shown they know what they're doing. Read an article about how they really need some supply side stimulus, as opposed the demand side they've been doing for a while now. But China hasn't really dealt with this before and that makes it even more difficult to predict what will ultimately happen. My only hope is they don't do anything stupid.

But either China will turn it around, or our market will finally price in China's problems. I don't see this as a systematic risk--this is regular business cycle crap we're dealing with. We'll get a little pain in the banking sector as the impact of oil and china loans going bad is felt. Personally, i'm waiting to sense some sort of bottom before I get in. Don't feel it yet.
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#12
Quote from ghostofposterspast View Post :
LOL. Just reported on CNBC. Some oil buyers are now bidding sub $0. That's right, less than $0. They want the oil producers to pay them to take oil off their hands.
Saudi Arabia and OPEC are playing a game of chicken with US shale. Let's see who blinks first. Very easy to put a floor in if they want
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#13
Quote from rrc06 View Post :
Saudi Arabia and OPEC are playing a game of chicken with US shale. Let's see who blinks first. Very easy to put a floor in if they want
I don't think it's SA playing a game of chicken with us anymore. That war is won. Look at the debt that frackers are trading at. They are dead. It's SA waging war with Iran. They have been playing a hot proxy war for years. That's what's happening in Syria and Iraq. Now that Iran is pumping again, the Saudi's want to sure that Iran gets as little for it as possible.
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Quote from ghostofposterspast View Post :
I don't think it's SA playing a game of chicken with us anymore. That war is won. Look at the debt that frackers are trading at. They are dead. It's SA waging war with Iran. They have been playing a hot proxy war for years. That's what's happening in Syria and Iraq. Now that Iran is pumping again, the Saudi's want to sure that Iran gets as little for it as possible.
Yeah they are kinda at war with everyone. The thing is, shale won't be hard to turn back on. We'll be lucky if we see $60+ in the next few years.

Deep water drillers are fish in the barrel shorts, even here. Lol at sdrl lol. They will all go bk before oil prices ever give them a chance to recover
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