Oil & Stocks Take the Plunge

Wherever crude goes, equities go. What will it take to restore some rationality to the market?

- Peter Coy & Matthew Philips

It’s scary out there. The rout in the stock market that began around Jan. 1 took a turn for the worse early this month. By Feb. 10 the Standard & Poor’s 500-stock index was down 9 percent for the year. That’s its worst start since the recession year of 2008. Falling oil prices were blamed: A meeting between Saudis and Venezuelans aimed at curbing production had ended inconclusively. West Texas Intermediate fell again below $28 a barrel—more than 70 percent off its 2014 high. Trigger-happy investors have gotten accustomed to selling stocks whenever oil dips. With oil in serious over supply, it’s hard to sustain any kind of recovery on Wall Street. “The toughest problem for people to deal with is oil getting linked with the market,” says Tobias Levkovich, Citigroup’s chief U.S. equity strategist.

Just in time for Valentine’s Day, it appears that oil and stocks have developed an unhealthy, codependent relationship. They’re way too deep into each other. Where one market goes, the other follows. If they were people, a counselor would be urging a trial separation. “This is highly unusual,” Torsten Slok, chief international economist at Deutsche Bank, wrote to clients in late January. “Call it the oil correlation conundrum.”

Or oilmageddon, as Citigroup economists have named it. Before you join the Cassandras, though, here are a few things to consider: First, cheap oil isn’t the boogeyman you’d think it is from reading the headlines. Upward spikes in energy prices cause recessions; dips don’t. The national average price of gasoline is down $1.01 from last summer. The money people save is fueling purchases of things like takeout food. “If you’re driving to work every day and you save $10 at the gas pump, you stop at Starbucks or whatever and spend part of that savings,” says Michael Montgomery, an economist with IHS Global Insight.