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What plummeting oil prices mean for the U.S. stock market

January 15, 2016 at 6:45 PM EST
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JUDY WOODRUFF: Now: the market plunge that is sweeping across stock exchanges from Asia to Europe to New York.

It has been relentless since the year began, and today was no different. The closing bell on Wall Street signaled the end to a turbulent day and a tough week for markets worldwide. Fueling the sell orders, another plunge on China’s Shanghai Composite Stock Index. It’s down 18 percent since the year began, as worries about the Chinese economy mount.

And plummeting oil prices are dragging down energy company stocks and the broader market.

In Washington, White House spokesman Josh Earnest said U.S. officials are closely monitoring the global sell-off.

JOSH EARNEST, White House Press Secretary: There’s no denying that weakness in other markets with whom we do extensive business is going to be a headwind for the U.S. economy. We’re mindful of that, particularly as the international economy becomes more integrated, and we have to be sensitive to movements that we see in the economies of other countries.

JUDY WOODRUFF: The U.S. market was also hurt by disappointing reports on several major economic indicators. Industrial production fell for a third straight month in December. And retail sales unexpectedly dropped a 10th of a percent last month, partly because warmer weather hurt winter clothing sales.

For a closer look at the dramatic drops in both the stock market and world oil prices, we turn to Liz Ann Sonders. She’s chief investment strategist at Charles Schwab. And Bradley Olson, he’s national energy reporter for The Wall Street Journal.

And we welcome both of you to the program.

Liz Ann Sonders, what is behind this volatility today in the market?

LIZ ANN SONDERS, Charles Schwab: Many of the same things, actually, that contributed to the volatility that we saw last year.

You have touched on certainly oil, but it’s more broadly what’s happening in the commodity complex, and not just the huge plunge, in and of itself, but what that says about global growth. Of course, related to that is China, the weakness there, not only in its equity market, but its economy, its currency. That is tied into commodity prices.

And then even more importantly was the uncertainty regarding the Fed. We got past the uncertainty the defined 2015 in terms of will they, won’t they, and if they will, when? They got the first rate hike. Now it’s what are they going to do from here? Are they going to continue to raise interest rates? What will be the justification?

So, a lot of it really is unfinished business from 2015. It’s just conspired to occur in a condensed period of time, unfortunately, right at the beginning of the year, which I think adds to the angst for investors.

JUDY WOODRUFF: Liz Ann Sonders, staying with you, so is this the kind of anxiety that’s justified or is this something that has just gotten out of hand in the last few days?

LIZ ANN SONDERS: It’s really hard to say at this point. I would love to know where this correction stops right here. We do not think that this is the beginning of a big, nasty bear market, but it could get worse before it gets better.

I think investors have been fairly skittish really for much of this bull market all along. And when you get these bouts of volatility, particularly if it’s got some fairly dire news associated with it, we really hunker down much more quickly than we have in the past, because I think we really changed the psyche of a generation of investors, not only because of the severity of the financial crisis, but the fact it came within 10 years from the bear market that preceded it.

So, I think that explains why we see this sense of urgency and sometimes panic kick in so quickly in this environment.

JUDY WOODRUFF: Bradley Olson, let’s talk about the oil side of this. What is driving this continued drop in oil prices?

BRADLEY OLSON, The Wall Street Journal: Well, there are two main factors at play.

The first one is a little bit tied to what’s driving the falling stock markets worldwide, and that’s China. China’s sort of always been the golden goose when it comes to oil markets, particularly with demand. China’s about the second largest oil consumer in the world, and so whenever there are indications that the Chinese economy perhaps isn’t going to be as strong as people had expected, it causes a great deal of uncertainty when it comes to oil.

The second factor is Iran. The sanctions are about to be lifted that were imposed by the United States and the European Union, and once those sanctions are up, a lot of people anticipate a significant a amount of oil coming into the market from Iran, perhaps as many this year as 500,000 barrels of oil.

So, the market is already oversupplied, and you’re going to dump additional barrels into the market from Iran. And then you have problems or questions about demand that would have been able to bring up the price. So, there’s just a lot of indicators that are not positive at this time when it comes to the oil market.

JUDY WOODRUFF: So, is it, though, expected that these countries are just going to continue to pump regardless of how low the price is going?

BRADLEY OLSON: That’s right. I mean, one of the things that you see happening when the price goes down is that everybody’s trying to make up for the lost revenue. And so this is something that’s actually happened in the history of oil crashes, is that all the producers and companies actually try to pump more oil because they’re trying to make up for whatever they have been losing by producing more.

In this case, a lot of people expected the U.S. shale companies and U.S. companies that were behind a major boon in production in the last few years to slow down, and they just haven’t done that yet. They have been a lot more resilient than anybody expected.

JUDY WOODRUFF: Liz Ann Sonders, you used the word panic a minute ago. Compare this to what was going on in 2008.

LIZ ANN SONDERS: Oh, I don’t think this resembles 2008 by any stretch, when you think about the proximate cause for that, it was obviously a seizure of the financial system which had global tentacles and the leverage associated with that.

And what we’re seeing now is a bit more concentrated in the commodity space. Leverage in the financial system is significantly lower than it was back then. I think what we’re seeing has a greater analogy to 1998 than it does 2008, where you had an environment where you had major currency disruptions, problems in the emerging markets.

It ultimately caused a tremendous amount of volatility and even a very severe correction in the U.S. stock market, but it didn’t take the financial system nor the U.S. economy down with it, and I think that’s the better analogy than 2008.

JUDY WOODRUFF: So what does that mean? You talked about the psyche of investors and how that’s changing, and I think you mentioned millennials. I mean, what is different about the psyche of investors today?

LIZ ANN SONDERS: Well, I think we’re well past certainly the go-go days of the late 1990s, where there was the cult of equities and everybody was enthusiastic about it, it was a hobby for many.

You didn’t quite build that back up into 2007. The bubble at that time was more outside the stock market, in that it was concentrated in housing. And those stocks and homes are the two biggest components of household net worth, so you have gotten the hit to both of those things, which I think what we have established, whether it’s millennials as children of the baby boomers or even the older generation after that, is not all that different than what we saw come out of the Great Depression, not that this environment is as extreme as that.

But it really instituted an era of deleveraging. And I would call it a smarter investor, smarter consumer. They’re not spending the windfall of these lower oil prices. Some of it’s going to consumption, but some of it is going to savings and continued debt pay-down. That’s the kind of psyche change I think we’re seeing.

JUDY WOODRUFF: Bradley Olson, you mentioned previous oil market crashes. What’s the history when something like this happens? How does the price of oil find its bottom before it starts to rise again?

BRADLEY OLSON: Well, what we see — usually, what they say, and it’s sort of an adage that exists in the market, is that low prices cure low prices.

What they mean by that is whenever companies and even countries, you know, don’t spend a lot of money, you will see that follow the oil market about a year or two years after they stop spending. And so what we have seen from the past is that when you have underspending for a year or two that doesn’t come to the level that they need to spend to increase production or to bring production to replace all the oil that they have already put out into the market, whenever you see that happening, that’s when the price starts to come back up.

Already, the level of spending is so low in the past two years, or it’s been reduced so much in the past two years, that it’s already worse than at any point in any two-year period in the 1980s. So you already have the ability to compare this downturn and this oil and natural gas crash to the worst of the periods of the 1980s when it was also very low.

So you have to go all the way back to the ’70s and the Arab oil embargo to find a time when the crash was as bad as it is now.

JUDY WOODRUFF: Well, it’s given us all a lot to, not just think about. Maybe we all need to turn to the history books in both the markets and the oil situation.

Bradley Olson, Liz Ann Sonders, we thank you both.

LIZ ANN SONDERS: Thanks, Judy.

BRADLEY OLSON: Thank you.

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