According to Newton’s “Third Law Of Motion” – “Every action has an equal and opposite reaction”, and when Newton said this, he could have been speaking about the relationship between the stock market and oil prices and not about Motion at all.

The fact is that, perhaps not “Equal”, but when the relationship of the stock market and the oil prices are concerned, the relationship is definitely “Opposite”. Or in other words, whenever the oil prices shoot up, there is almost always a decrease in the stock market values, and whenever the oil prices are reduced, the stocks react positively. Let us investigate.

Stock Market, Oil Prices And The Economy

These three factors are actually extremely interrelated (however please note that the reverse is not true – or on other words, stock market prices do not in any way impact the oil prices).

Let us take the example of inflation figures to understand this relationship. In many countries, the inflation figures are released weekly and whenever they show an upward trend, the stock market takes a note of this and nosedives. And of course increased oil price will have a negative impact on the inflation figures because when oil prices go up, the prices of everything seem to shoot up too. The cost of production increases, the cost of transportation escalates and there is of course a negative impact on the cost of living.

Here are some of the markets and the stocks where there is the most impact…

• The Services sector that include transportation, hotels, support services, media, retailers, entertainment and leisure.
• The Consumer good sector such as automobiles, textiles, household non-durables, commodities and household durables.
• The Finance sector including banks, assurance and insurance companies, investment companies and real estate.

So this is how it happens. The first thing that goes up is the oil price and this automatically leads to higher inflation figures, and when these figures are released, the stock market nose dives. But in many cases, the stock market is able to predict that result increased oil prices will have on the economy and begins to go down even before the inflation figures are announced. It is such a sensitive thing that even a 10% increase in oil prices can have a profound impact on the stock market.

What Happens When The Oil Prices Go Down?

The impact is just the opposite here. There is almost always a positive impact in the stock market whenever the oil prices are reduced. In fact, with a 10% reduction in oil prices, the market returns from stock trading the next month can go up significantly – up to 50% or more for some stocks.

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