A "different" take on oil's relationship to markets
(Rev. Shark)
Oil Isn't the Market's Boogeyman
6/28/05 8:44 AM ET
Listen, and understand. That terminator is out there. It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead.
-- Kyle Reese, "The Terminator"
Is crude oil an economic terminator? Will the prospect of steadily escalating oil prices kill both the economy and the stock market?
If the stock market falters, it isn't going to be solely because of oil prices. All you have to do is glance at the charts of crude oil prices and the indices to see how little correlation there is between the two. During the past year alone the market has moved up very nicely at the same time oil prices were increasing.
Despite the weak correlation between crude oil and the indices, it would be a mistake to conclude that oil doesn't matter. In fact, sometimes oil matters very much, such as last week when the market was psychologically and technically vulnerable. Oil was used as a very convenient and logical excuse for an extended market to pull back sharply.
If you are a market commentator, the obvious headline was "$60 oil causes the market to crumble," but the real headline should have been "vulnerable market uses crude oil as an excuse to correct."
Oil is not so much a causative factor as it is a very high-profile and convenient excuse for market participants to take profits and for the indices to correct. Oil certainly has some real economic impact, but the day-to-day market gyrations that it causes are more about the market's mood than dollars and cents.
Now that oil has cracked the $60 level and the market has pulled back sharply, investors will likely start focusing on other matters such as the FOMC interest rate decision and end-of-month window dressing. Oil has done what it needed to do: It has caused a market correction and can now be dismissed for a while as market participants look for reasons to support a recovery of some sort.
Oil isn't the monster that it seems at times. It is just one of the many factors that sometimes become dominant as the market looks for reasons and excuses to justify its gyrations. The market itself is what causes oil to be an important factor, not the other way around.
Oil is back under $60 this morning and the market is perking up. Overseas markets were strong and the dollar continues its recent strength. I strongly suspect the sensitivity to oil prices will lessen over the next couple days as the focus shifts to the FOMC and the possibility that we only have two or three more interest rate hikes to come. I believe that will be the catalyst for the market to recover somewhat from the recent beating.
