Oil And Stocks Are Joined At The Hip – The Real Reason Why, And What It Means For You

It used to be that the price of oil and the markets as a whole were disconnected.

But these days, it seems like they are instead dancing in unison. When oil goes down, stocks go down right with it.

There is no shortage of suggestions why.

In fact, every pundit appears to have a ready reason (or reasons) why the two are now joined at the hip. And in each case, the rationale points toward some fundamental factor underlying both.

Unfortunately, none of them explain what is really going on.

The real cause is quite different… and it’s a cautionary tale for anyone investing in energy…

But first, let’s debunk four common myths about the link between oil and the markets.

1. Falling Oil Prices Do Not Signal a Global Slowdown

The first “hypothesis” is the one heard most often these days: it’s the economy, pure and simple. This approach suggests that falling oil prices are actually signaling a global economic retrenchment. According to this argument, economic declines worldwide are translating into anticipated cuts in oil demand.

Some are even moving further, claiming that the oil plunge is presaging an international depression.

The problem with this logic is itself straightforward. First, despite concerns over China and other economies, aggregate energy demand is actually increasing. Pundits continue to spread a basic misunderstanding about the real impact of recent market trends.

Global economic strength is hardly dependent upon China having to show a 7% annual growth rate. What is crucial in this regard remains the following: global aggregate markets are continuing to expand, while overall energy demand worldwide increased almost 3% last year, with 1.8% of that increase accounted for by oil alone.

In other words, there is no statistical basis for believing that declining oil prices are a harbinger of a collapse to come.

Indeed, the traditional result has been quite the opposite. Lower energy costs have generally translated into better (read: “cheaper”) economic performance for broader markets.

That brings us to a second proposed explanation…