What Plunging Oil Prices May Be Telling Us About the Stock Market and Global Economy


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The Dow Jones Newswire just reported that:
Oil prices are in a bear market and for some, that is raising questions about global economic health. Should investors be worried?
What has happened to oil prices? More significantly, what does it mean for the broader stock market and the global economy? That is what some Wall Street investors are scratching their noggins, as crude futures and U.S. stocks staged a tandem tumble this week, just when investors thought the worst was over following a bruising October for risk assets.
Now, oil futures are unraveling, down at least 20% after putting in a 52-week high early last month. And it isn't so much the descent into bear-market territory as the recent slump for crude can be characterized, as it is the celebrity of the sell off that has market participants unsettled.
Few market participants believe that crude's current downturn is a reflection of global economic weakness and a precursor of something more pernicious to come, like a recession.
"I think the drop in oil has more to do with the 1 million barrels worth of Iranian oil which wasn't expected to be in the market, but now needs to be factored into the supply equation, because so many waivers were granted allowing firms to buy Iranian oil after all", said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. He's referring to waivers granted to eight big importers of oil, including China, that may have capsized investors' expectations for more damaging disruptions from sanctions against Tehran.
In other words, the decline in oil has been precipitated by a glut of supply that isn't expected to be matched by demand, when the opposite had been expected just a few weeks ago.
Moreover, the correlation between oil declines and stocks aren't always meaningful. Falling crude-oil prices don't necessarily correlate with a parallel drop in stocks. The only point over the past 20-years that a drop in oil has coincided with a decline in stocks was during the height of the 2008 financial crisis. Back then, there were many forces at play that fed the global stock rout, including the bsankruptcy of Lehman Brothers, which rippled throughout the financial universe.
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