Oil and water do not mix together but stock prices and oil prices does!
Both, the oil prices and stock prices were declining with the correlation of about 91% when oil prices dropped down to $40 per barrel in December 2015. Leo Chen who is the quantitative analyst at Cumberland Advisers called this correlation a “black swan”. According to him this correlation between oil prices and stock prices is not usual.
From past five years the correlation between S & P Index and the oil prices was negative 71.8%. This shows that the stock prices and oil prices move in opposite direction. If oil prices rise, the stock prices fall and vice versa. However, from past twenty years this correlation has not been more than 25% as compared to current 91%.
Now the question here is what is so few and far between now and then?
As we know that these days the oil prices have been declining from the last quarter of 2015 in the international market. However globally this drop is not being considered as a good news. But why? Why this decrease in oil prices is not welcomed in the economy?
It’s quite complicated!
There are many reasons behind this and different analysts and investors hold different view point. Some believe that this drop in oil prices is bad news for the corporates as it would affect their profits in the long run due to less demand of oil. This also includes productive economies like China, where the growth productivity has gone slower. Another school of thought relates it to prevailing trend of dollar in the exchange rate markets.
In order to understand the phenomena behind the swift dropping of oil prices, you may visit my article Dropping Oil Prices: An Alarm for Saudi Arabia. To get more information on current trend of dollar in the exchange market, visit my article
We may believe that there are several other ingredients involved in this oil and stock curry which are adding flavors to confuse the whole recipe. We may also say that if the investors would take a flight from commodity markets due to prevailing uncertainty and high risk aversion then the volatility in the stock market may also be another reason for the stock market and the oil prices to move in same direction against the norm.
However, the good news is that recently the slight temporary boost in the oil prices also raised the sentiments on Wall Street and the Dow moved up sharply. The blue chip companies got up with 153 points.