The past several months have brought turmoil to the stock market. Stocks are sliding and investors are hoping each passing day that the bottom is near. News outlets like CNBC are pointing to the recent correlation between stocks and oil as the reason for the downturn. But what is causing the correlation between the values of crude oil and big businesses?
Cheap oil is good for filling up at the pump. Isn’t it the same for companies? Actually, it is. Sean Ross of Investopedia.com wrote, “Conventional wisdom holds that an increase in oil prices will raise input costs for most businesses and force consumers to spend more money on gasoline, thereby reducing the corporate earnings of other businesses. The opposite should be true when oil prices fall.” Yet as oil prices and input costs associated with oil are falling, so are market caps. Even transportation companies, where oil is a huge determinant of cost, are down in recent months. FedEx Corp is down 14% just this month.
It appears there is little sense to be made of the recent correlation between stocks and oil prices, yet they are still declining hand-in-hand. So what’s the secret variable responsible for this mess? Fear.
The financial market is facing a great storm. Like any storm, a perfect mix of conditions are required. Everyone thought China was the land of limitless growth opportunity, but recent figures suggest the country’s growth to be slowing. China is also letting its currency inflate, which makes it harder for other countries to export to China, but easier to buy Chinese goods.
The Fed, led by Janet Yellen, has been blind to the turmoil and points to strong employment numbers in order to increase interest rates, which further discourages investment. Add decreasing oil prices on top and investors become scared of recession. They pull their money not only from oil, but also stocks to make up for the money lost in oil and to prevent future losses. “It’s the pain trade,” says Michael Block of Rhino Trading. “Stock prices aren’t just driven by fundamentals. They’re driven by who owns what.” We’ve seen exactly this result as the market has sold off in huge numbers, destroying around $2 trillion dollars in capitalization. While oil appears to be in charge of the markets, it is the fear of investors that’s really calling the shots.
Images from Investopedia, Yahoo! and Zero Hedge