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If the oil price is swinging lower then the stock market usually also soon starts to swing lower and that is exactly what happened to the stock market beginning in early January only to be further exacerbated by the rise of the COVID-19 pandemic in mid-March. Talk about a perfect storm!
By Lorimer Wilson
A falling oil price is a net positive for the general stock market – up to a point – and that point appears to be around $50. Any drop below $50 is perceived as the harbinger of economic and thus stock market catastrophe as the loss of resulting demand due to loss of robust economic activity usually pulls the general stock market indices lower – and that is just what’s happened in the past few months as the charts below so clearly illustrate.
By amalgamating the charts above one can see the dramatic rise in the Dow:Oil Ratio as illustrated in the chart below.
The Bottom Line
Where the stock market goes from here depends to a large degree on the future trend in the price of crude oil. Hopefully the recent agreed upon cap on oil production by Saudi Arabia and Russia will see a continuing increase in the price of oil going forward not withstanding the continuing COVID-19 “economic” crisis of high unemployment and little, if any, economic growth for the next 2 quarters of 2020.