Stocks Slip On Oil Slick

1/25/2016


Stocks have slumped amid a continuing rout in oil prices, pushing the Dow Industrials and S&P 500 Index near the closing lows reached in August. With the primary trend in the bearish camp, subscribers should maintain a defensive posture. Our buy lists have 21% to 24% in a short-term bond fund.

Gone bust

Historically, oil and U.S. stock prices were not positively correlated, partly because lower oil prices were seen as a positive for the U.S. economy. The U.S. remains a net importer of oil, and most economists say falling oil and gasoline prices still do more good than harm for the U.S. economy. So, why have oil and stock prices moved nearly in lockstep in 2016?

For one thing, the boom in shale-producing regions — one of the most dynamic parts of the U.S. economy since 2009 — has gone bust. For another, investors worry about the impact on oil-dependent overseas economies, many of which face severe budget problems and potential unrest.

Also, today's low oil and commodity prices serve as a barometer of weakening demand, especially from China. While excess supply often takes the blame for the collapse in oil prices, sharp declines in prices for iron, copper, and other commodities reflect slumping demand from China.

Both here and abroad, the oil and commodity slump raises fears of widespread bankruptcies and bond defaults. Banks have reported a jump in provision for bad loans to energy producers — one reason the banking group has slumped in line with the market despite generally solid December-quarter results. Yields in the U.S. junk bond market have jumped, with losses spreading beyond the hard-hit energy group.

In recent months credit fears have spread beyond junk-rated debt. Yields on Baa-rated corporate bonds, at the low end of investment grade, now exceed Aaa-rated yields by more than 1.4% — up sharply from the spread of less than 1% that prevailed through most of 2013, 2014, and the first half of 2015.


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