Oil and Stocks Part Ways
by Eddy Elfenbein, Crossing Wall Street
One of the interesting developments this summer is that the previous relationship between oil and stocks seems to have broken down. For several months, the two asset classes were like waltzing partners. Wherever oil went, stocks werenāt far behind. Or maybe it was the other way around.
Either way, the relationship appeared solid. Even when both markets turned in early February, they turned together.
Lately, however, the two seem to have parted ways. Itās hard to place an exact starting point when this happened. I think something clearly broke down at the beginning of May. But by July, oil and stocks were no longer speaking.
According to the WSJ, the correlation fell to 0.77 although Iām not sure what time frame their figure indicates.
What does this all mean? Thatās hard to say exactly. I think weāve moved into an era where low oil prices are good ā that is, until theyāre not. Thereās probably a point at which low oil is a net negative for the U.S. economy. I suspect thatās below $40 per barrel but thatās just a guess.
OPEC has noticed the lower price for oil and theyāre going to hold a less-formal meeting next month. I strongly doubt theyāll come to any agreement on holding back production. The Iranians are recently off sanctions and theyāre going to gun supply until they get back to pre-sanctions levels. The Saudis also donāt seem interested in cutting back production. My guess is that weāre going to see more downward pressure on oil this year.
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