OIL AND STOCKS SEESAW
Somme bunk oes in and out of style. This one was red-hot in recent years. But as I write in 2010, you don’t hear it as much. It will be back—probably the next time oil prices rise a lot, fast—or rise for a long time.
The fairly universal belief is high oil prices are bad for stocks. When oil is up, stocks go down—they’re negatively correlated. And to get higher stock prices, you want lower oil prices. But it’s bunk. (Interestingly, this is one you hear more when oil is high. When oil drops a lot in price, folks don’t say, “Phew! Everything is great now!”) Long term, they mean nothing to each other and one isn’t predictive for the other—that’s provable.
A Dollar Spent Is a Dollar Spent
The thinking is fairly intuitive (which by now you know to spot right away as a likely bad sign) and goes: We’re too oil dependent! Higher oil makes life more expensive—we need oil just to go to the grocery store or work, so we spend more on gas, heating, or air conditioning and less on other stuff. This slows the economy and means lower earnings and profits for firms as money gets sucked away from them and into our gas tanks—and it’s all ultimately bad for stocks.
First, borrow for a moment from Part 5 and think globally, and this belief starts seeming silly—even before the data crunching and checking history (which devastates this myth, as you’ll soon see). See it this way: A dollar spent in the global economy is a dollar spent in the global economy. If you spend ...