There is a scary correlation between stock and crude oil, as we have seen when oil prices plummeted to $26 a barrel, sending the S&P 500 to unforeseen levels. Oil is “hardly a proxy of the U.S. economy, and in fact, energy makes up less than 3% of the U.S. economy, according to the Bureau of Economic Analysis.”
However, here’s why investors are so intensely focused on cheap oil:
1. Falling prices often signal softness in demand that can foretell an economic slowdown.
2. Cheap oil is causing U.S. oil production to cool, off, weighing on profits from energy companies and the economies of Texas and North Dakota.
3. The threat of billions of oil loans imploding raises the risk of trouble in the banking sector.
4. Chaos in the oil patch is causing junk bond yields to spike, especially in the energy sector.