Why is Oil price and the stock market postively correlated?

Answer 1

Oil prices and the stock marketare usually positively correlated and for several reasons. Higher oil prices benefit refiners and energy producing companies by increasing margins which typically inflates the price of their common stock. In addition, an increase in the price of energy and specifically oil usually indicates growing demand. Growing demand may imply a strengthening economic environment, which would indeed bolster the levels of equity prices. Finally, stronger energy prices may indicate a weaker US Dollar (for US markets), which tends to promote riskier assets such as equities.

However, prices which grow too rapidly may indicate hyperinflation which may in turn promote immediate consumption as opposed to investment. The lack of demand for financial instruments would certainly put downward pricing pressure on equities. To add to that point, as energy prices increase, the amount of discretionary income of consumers typically declines, which may impair the economy and the equity markets. That being said, oil usually maintains its positive correlation with the Stock Market.