Transcripts

A Look at the See-Saw Relationship Between Oil & Stocks

SUSIE GHARIB: Oil prices rose sharply today, giving investors on Wall Street inflation jitters. In New York trading, September crude futures jumped almost $3 to $116 a barrel after the government reported that U.S. oil and gasoline supplies fell last week. Well, that oil rally led to a stock sell-off. The Dow lost 109 points. Suzanne Pratt takes a closer look at why stock prices and oil prices are moving in opposite directions these days.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In what has recently become a familiar pattern on Wall Street -- when oil prices fall, stocks gain steam. And if oil goes up, the stock market often heads south, just as it did today. Standard & Poor's Sam Stovall says one of the reasons for the connection between oil and equities is that higher energy costs cut into corporate profits.

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: When oil prices rise, in general, you would find that most industrial companies would be adversely affected, because one of their input costs would be going up.

PRATT: Evidence shows that over the long term, there has not been a strong inverse relationship between oil and equity prices. But in the last month, the connection has been very clear. That's as sky-high oil prices have become more terrestrial. On July 11, oil hit an intra-day high of more than $147 a barrel. Four days later, the Dow bottomed at under 11,000. Since then, while oil prices slid 21 percent, the blue chip index rebounded, gaining about 600 points or 5 percent. To be sure, there have been other variables supporting the recent move higher in stocks.

STOVALL: I think lower energy prices, the strengthening of the U.S. dollar, the falling of gold prices, et cetera. Those factors together, I think, have been helpful for equity prices in general.

PRATT: If oil prices fall further in the coming months, most experts believe the stock market will continue to benefit. But others say investors must also consider why energy prices are falling. Oil experts say it's because there's evidence of slowing demand for petroleum products. Andrew Burkly of Brown Brothers Harriman says weaker demand for oil suggests a slowing economy, which ultimately is not good for stocks.

ANDREW BURKLY, MARKET STRATEGIST, BROWN BROTHERS HARRIMAN: Really, stocks in our opinion are not going to gain a lot of traction until you see leading indicators of the economy start to improve. In that, I think we're still waiting on evidence of that. The economy is still pretty sluggish.

PRATT: Experts also point out the connection between oil and stocks is strongest whenever we see sharp upward or downward moves in energy prices. So, if oil prices head into a trading range, they expect stock prices will be held hostage to factors other than oil. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.