Does Cheap Oil Mean Bad News for Equity Markets?

In the past, cheap oil has meant good news for equity markets - but the beginning of this year has suggested the two are no longer positively correlated

John Rekenthaler 2 February, 2016 | 4:40PM
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On January 21, former Federal Reserve vice chairman Alan Blinder asked the obvious question: Since when is cheap oil a bad thing?  One would think that it's positive news for a vital commodity to become readily available. True, those countries that export the commodity will lose revenues, but the world overall will gain wealth. Yet in recent months the major stock markets of the United States, Europe, and Japan – all net importers that would seemingly enjoy the full benefits of oil's price decline – have slipped when oil prices have declined.

This has happened, says the Wall Street consensus, because oil prices are the canary of the global economy's coal mine. If they are slumping, that indicates slack demand and upcoming economic woes. Most Wall Street economists have therefore been downgrading corporate earnings forecasts and upgrading their probability of a U.S. recession.

Blinder begs to differ. In his view, as given in The Wall Street Journal, stock markets have "got the direction wrong." He continues, "Ask yourself: When the price of something you buy goes down, does that make you better off or worse off? No, it isn't a trick question. The obvious answer is the correct one. Other things equal, each of us is better off when the prices of things we buy, including oil, go down."

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.

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