Tags: Oil | Price | Bear | stocks

Oil-Price Decline Forecasting a Bear Market in Stocks

By    |   Wednesday, 06 Jun 2012 08:42 AM

Most economic principles come down to basic concepts.

When we look at the most basic factors that drive oil prices and the stock market, current signs point to a global economic slowdown. In all likelihood, a bear market in stocks is ahead for investors.

Rising oil prices are generally the sign of a healthy economy. This shouldn't be surprising since oil is the fuel that drives manufacturing and transportation systems. That is true in the United States and all other countries around the world. Economic growth should create an increased demand for oil and an increase in demand of anything usually leads to higher prices.

Stock prices move up and down with the economy. When the economy is strong, companies are able to increase their profits and investors find their stocks to be attractive investments. As one example of this, President Ronald Reagan jump-started the economy in the 1980s, U.S. companies returned to profitability after years of concerns about Japan replacing America as the world’s leading economy, and stock-market investors enjoyed almost 20 years of gains.

Those gains weren't limited to the United States. The global economy also grew, partly because U.S. demand provided a market for the goods made in other countries. Demand for oil rose to meet the economy’s needs and oil prices rose.

That has all changed in recent years. Today, oil prices are pointing toward a bear market in stocks, which will be the third one in less than 15 years.

Sustained drops in oil, defined as times when the price is lower than it was three years ago, have preceded stock market declines since the 1980s which is when oil started trading on the futures market.

Oil prices have been falling for nearly four years as the global economy has slowed. Companies are reporting little earnings growth and increased regulatory costs point to even lower profits.

Stocks have begun a summer swoon that may turn into another steep fall, just as investors were recovering from the losses of 2008.

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Wednesday, 06 Jun 2012 08:42 AM
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