How does the price of oil affect markets?

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Oil's up, oil's down, but how does it affect the markets? The conventional wisdom is that high oil prices creates inflation that hurts consumers and ultimately drive down the market, but researchers have shown that this is an oversimplification.

While high oil prices do create consumer-unfriendly inflation, the relationship to the stock market is not so clear cut. In fact in 2008 economists at the Federal Reserve Bank of Cleveland actually studied the relationship between oil prices and the stock market .

The researchers found that while both oil prices and the S&P 500 had mostly climbed over the previous decade, they had frequently moved in opposite directions. The correlation between oil prices and stock prices is weak.

When the economists broke down the stock market into sectors, they found that most sectors had no statistically significant correlation to oil prices, but with two big exceptions.

The Dow Jones Transportation Index had a significant negative correlation to oil prices. Airlines and other transportation companies such as shipping and logistics companies depend on fuel, so rising oil prices hurt transportation stocks and falling oil prices help them.

The S&P Financial Index also had a significant negative correlation. Since finance is not directly affected by energy costs, some analysts argue that this represents the effect bad financial news has on the oil markets. When the finance business goes sour, investors move their money to commodities like oil.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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