The S&P 500 is off to a solid start this month, but analysts and traders remain cautious since this spike in stocks is due to a rebound in oil prices from recent lows. The fundamental strength of the oil market is still bleak as the massive supply glut continues to persist, which may eventually drag the markets down.
This uncertainty about future price movement makes dividend stocks more attractive as they tend to outperform when the broader markets are subject to gyrations. Moreover, likelihood of rates not going up as fast as the markets once assumed has made dividend paying stocks more appealing. Conversely, investments in the bond market that tends to benefit from a rise in interest rates have lost its lure.
Oil Takes S&P 500 on Rollercoaster Ride
They say it takes two to tango, and the oil price and the S&P 500 have become close partners. Whenever the oil price moves up, the index climbs, while any downward movement in the oil price drags the index down.
The index closed in the red for the first two weeks of February when oil prices plunged to $26.05 a barrel on Feb 11, a 13-year low. However, prices rebounded an incredible 32% to $34.40 a barrel on Tuesday, which eventually helped the S&P 500 to end in the green in the last two weeks of February and also post its best ever start in March since 2002.
This rise in oil prices was primarily due to hopes that major oil producers including Saudi Arabia and Russia will take a decision to stabilize output this month. However, for the freeze deal to be successful, participation from Iran is also necessary. Officials from Iran think this deal is a “joke.” In fact, Iran is making moves to pump an additional 1 million barrels of oil per day in an already oversupplied market.
And it’s also hard to be excited when there is enough supply glut in the U.S. According to the Energy Information Administration, crude oil inventories increased 3.5 million barrels last week to almost 508 million barrels.
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