Why Oil Doesn't Move Stocks Anymore

May 19, 2016

For months, crude oil was caught in a vicious downtrend that looked like it would never end. That all changed in February, when prices began a surprising reversal. Now crude oil is in a steep uptrend, with prices steadily climbing day after day.

On Tuesday, Brent crude oil prices approached $50 a barrel for the first time in six months. That's a whopping 85% increase since prices bottomed at $27 earlier this year.

Anticipating further declines in U.S. crude oil production, most traders and analysts believe that the worst of the oil market glut has passed, and that the market will reach equilibrium sometime in the second half of the year.

This week, the Energy Information Administration reported that U.S. output dropped below 8.8 million barrels per day―800,000 barrels per day lower than where it was 10 months ago.

Brent Crude Oil Price Chart

Oil Rebound A Relief For Markets

The increase in crude oil prices has largely been welcomed by broader financial markets. Just as crude oil fell to its lows earlier this year, so too did the stock market. Similarly, as crude oil bounced back in March and April, so did equities.

In particular, energy stocks―one of the main sectors in the S&P 500―were walloped in January and February, only to come roaring back in subsequent months. Down as much as 14.2% in January, the Energy Select Sector SPDR Fund (XLE | A-90) is now up 10.3% year-to-date, the second-best performance of any sector.

But it wasn't just energy stocks influencing the broader stock market. High-yield corporate bonds were hit hard as oil fell to its depths on concerns that default levels would rise as energy companies (which were heavy issuers of junk debt) would be unable to make interest payments.

Fears of an energy-led junk bond crisis reached fever pitch in January and February, only to fade as oil rebounded.

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) was down as much as 5.7% in January, and is now up 5.3% year-to-date on a total return basis.

YTD Returns For XLE, HYG, Front-Month Oil

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