This indicator may be telling us the economy is in more trouble than stock prices suggest.
Crude oil settled at a five-month low on Tuesday at a time when the S&P 500 index is near its all-time highs. Is oil telling the markets that it should start worrying about the economy?
Conventional wisdom holds that the price of oil and the stock market should trade in opposite directions. After all, energy is an input in just about everything the economy produces. But, a look, at the data shows that the two have been trading in tandem.
From the market's bottom in March 2009 until the end of last year, the S&P 500 was up 111% while crude oil was up 99%. Even for the first half of the year, the S&P was up 13% while crude oil gained nearly 7%. But over the last two months, the S&P 500 is up 6.5% while crude oil is down 13.5%. Having closed at $93.72 per barrel on Tuesday, oil is now trading where it was back in June.
John Stephenson, portfolio manager at First Asset Investment Management, says lower oil prices will help stock. "Many people said that high crude prices are really bad for the economy," says Stephenson. "But, the fact of the matter is high crude prices come from a strong economy."
Stephenson also asserts that declining oil prices has an effect on sentiment. "As an impact on the actual consumer, it's only three and a half percent of the family budget," says Stephenson. "So, it's not a big impact but it'll make people feel a little better."
"Overall, I see this divergence as being very healthy and continuing to add to the strength the [Federal Reserve Bank] is giving us to sustain this rally," says Stephenson, referring to the Fed's $85 billion per month monetary stimulus. "I see this as very, very positive."
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, believes that the divergence between stocks and crude prices is a sign things may not be as good as they seem.
"Crude oil [has been] viewed more as a proxy for global economic recovery than as a headwind for the economy," says Ross viewing the charts comparing prices in the S&P 500 to oil over the past half-decade. "Now we see this curious divergence. On a year-to-date basis, the S&P is up 23% and rising as we speak. Crude oil is up only 2%. Is this really a proxy for the economy [or] is it telling us that perhaps the economy is not as robust as the action in stocks might otherwise suggest?"
Ross sees the price of oil continuing to fall and for him, that's not a good sign for stocks. "I think this is a bearish divergence for equities," notes Ross.
To see more of Stephenson's fundamental analysis and Ross' technical analysis on what falling crude oil prices mean for stocks, watch the video above.
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