I heard that if the price of oil is low that means the stock market is not doing well. Is this correct?
That's a great question. Although the price of oil (and other commodities) has often been viewed as an indicator of economic strength, when prices were high, or weakness, when prices were low, that is not always the case. Low oil prices benefit consumers who in turn may spend more on goods and services, consumer discretionary stocks tend to do well in this envirnment. In addition, airlines, shipping and freight companies, automobiles, and even consumer staples tend to do well in a low oil price environment. So in summary, low oil prices don't always indicate a slowing domestic or world economy as there may be other factors invloved, as there is today, such as oversupply that is driving oil prices down.
The price of oil depends on the supply and demand relationship of the commodity. Your assumption is true when demand for oil is lowering because the economy is slowing; companies and consumers might start to lower their consumptions. If oil companies do not slow down their production, supply and demand will be out of balance and price will go down. And vice-versa.
However, there are times like right now, when demand is still strong but supply is growing too fast. It has been the case since US companies have been able to frack for oil. There has been an influx of oil inventory which lowered the price of oil to about $30 from over $100. It is now stabilized at around $45-50.
The good news is lower energy cost means higher profits for companies and more income for consumer to spends, which has helped our economy during the last couple of years.
I hope this helps.
Energy related companies have had problems with earnings, naturally, as oil prices have dropped. However a lower oil price in theory may help other companies such as airlines. Neither of these are recommendations, only observations. There is some correlation to the oil market and the capital markets, some of this though is that oil prices are low because economic expansion may also be sluggish.
The short answer is no, this is not correct. There are times when the price of oil is correlated to stock markets, but it appears to have occurred when the price of oil was much higher than it is now. This happened during the second half of 2014 and most of 2015 when the price of oil declined from $90 per barrel to less than $30 at one point during early 2016. Over the long run, the relationship between oil and stock prices is generally not relevant.
That being said, to the extent that lower oil prices impact energy companies and their business operations, then yes, a drop in revenues and profits from energy companies could negatively impact the market and cause volatility.
The health of the economy and corporate fundamentals is what generally impacts the market over longer periods. There is a host of issues that can impact markets over the near term including volatility energy prices (and certainly rapidly declining energy prices) among other events.
This is a complex and interesting question. Stock markets are related to all kinds of economic variables, one of which is oil. Still, stocks are directly related in the long term to corporate profits and the multiple investors are willing to pay for those profits. When economic conditions are not difficult, with interest rates low as well as inflation, investors usually pay more for those profits. Oil can help bring inflation up, but it is only part of what constitutes inflation. You can invest in all kinds of instruments related or unrelated to oil as a way to hedge your exposure to it, or reduce your exposure to stocks. The question is a bit to general to give a straight yes or no answer, but no, if the price of oil is low, it does not mean the stock market is doing well. In many cases, it helps stock markets all over the globe perform better. I hope this helped answer your question.
Yale Bock, CFA
Y H & C Investments