Falling Oil Prices Depress Stock Prices

Investors saw the market continue to slide throughout February, as stocks followed the downward trajectory of oil prices – a pattern which began in January. Not surprisingly, investment experts were puzzled, as well as unhappy, to see this unmistakable correlation between stock valuations and oil prices. This connection is a recent one; we have not seen this pattern in the past decade or so. There’s no doubt we are seeing it now. Experts have noted that oil prices and the Standard & Poor’s 500 index have been marching in close formation for 87 percent of the time since 2016 dawned – and that, in the last weeks of February, the correlation has been even tighter. Since oil prices have hit new lows this year, the S&P 500 has lost 5.5 percent of its value. Here are the major talking points.

1. Is the turmoil in the energy sector spilling over into other areas? It depends on who you choose to believe. Some analysts believe that we are beginning to see other factors, such as positive economic news, lifting stock prices. At the end of February, we saw strong manufacturing data and a positive sign from consumers as orders for durable goods increased, outstripping previous forecasts. Other analysts are less optimistic.  Financial stocks also have been hit hard because investors worry about the possibility of major loan defaults in the oil and gas sector. Some worry that businesses and consumers in states like Oklahoma and Texas will be hit hard by the downturn in the energy sector. They predict companies across the board will find credit tighter. Other analysts believe that fears like these are an overreaction and that spill over as such has been minimal.  
2. Will major producers scale production back? Hopes that U.S. energy producers would cut production were not realized and neither were predictions that OPEC, especially Saudi Arabia and Iran, would cut back. Investors are slowly coming to accept the fact that oil prices will stay low for a while. Some analysts fear that those emerging nations that are heavily reliant on oil income will see their purchasing power decline and create a slowdown in global markets. Some experts anticipate that volatility in U.S. markets will remain until oil prices bottom out.
3. Are fears of a recession unfounded? Many analysts believe that the bull run is not over, and that the market volatility which peaked in late January/early February has begun to subside. As February drew to a close, we saw both energy and financial stocks rally. Many hope that this means a beginning of the end of the correlation between oil prices and market performance. Some are hoping that upcoming economic and job reports will help fuel more optimism. Federal Reserve Chairman Janet Yellen has hinted that the Fed will raise interest rates gradually, but just how gradually remains to be seen. There is no shortage of advice coming her way from a variety of market sectors. Many policy makers are urging caution and a moratorium on possible rate hikes until oil prices stabilize and global economic uncertainty eases.

Successful investors understand the importance of discipline in challenging times, avoiding knee-jerk reactions to market changes. As always, the above commentary is general in nature and should not be substituted for professional guidance from your tax and investment advisors.

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