Ask Matt: Why is cheap oil bad for stocks?
In this Jan. 23, 2015 file photo, the posted cash price for regular unleaded is $1.71, as seen through a pump handle at a gas station in downtown Newark, N.J.(Photo: Julio Cortez, AP)
Q: Why is cheap oil bad for stocks?
A: Falling oil prices are routinely blamed for hurting stocks. It might seem counterintuitive, but seeing a commodity market in free fall makes most investors nervous.
Cheap oil on its face should be a boon for companies. Oil, one of the key raw materials used in many industries and a major cost for consumers, has seen its price drop roughly 70% in the past 12 months. That's a big-time price break for anyone who consumes oil, which might seem to help the economy and stock market, not hurt it.
But instead, stocks routinely fall on days that oil prices drop. There are direct and indirect reasons why falling oil prices are bothering investors. Here's the direct hit. Remember energy accounts for about 7% of the Standard & Poor's 500. When energy stocks are cratering, that's an anchor on the market. Keep in mind, too, energy profits are expected to fall 70% in the fourth quarter, which is a major reason why S&P 500 earnings are expected to drop 5%, says S&P Capital IQ.
There are indirect reasons why stock traders don't like to see falling oil prices, too. There's a concern weak oil prices could result in higher defaults by energy companies. If that happens, some investors fear about loans banks made to energy companies. Investors are also worried the rapid drop in the price of oil — a key commodity — is signaling something about the global economy. Energy experts, though, insist oil demand is stable. If that changes, investors fear oil prices are a tipoff for a slower economy.
USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at This email address is being protected from spambots. You need JavaScript enabled to view it. or on Twitter @mattkrantz.
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