Why are stock prices moving up and down with oil prices?Contributor Dr. David Kelly
While it is logical for energy company stocks to move up and down with oil prices, we believe the high correlation of stock prices with the overall equity market has been caused, in part, by markets misinterpreting oil price weakness as a sign of more general trouble in the global economy.
The positive correlation between oil prices and stock prices in recent years can be seen in the chart below. At first glance, it is puzzling since, for many years, the U.S. has been a heavy net importer of oil. As a result, lower global oil prices should have been a positive for the U.S. economy with the consumer benefit from falling oil prices outweighing the pain inflicted on producers. Indeed, it is worth noting that a spike in oil prices immediately preceded four out of the last six U.S. recessions. It does have to be acknowledged, however, that energy companies account for a much bigger share of the stock market than oil production represents as part of our GDP. So while lower oil prices have been overwhelmingly a positive for the economy, this has always been a closer call for the stock market.
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.
Copyright 2016 JPMorgan Chase & Co. All rights reserved