Former U.S. Fed Chairman Ben Bernanke weighed during this week on one from the more curious market developments recently: the growing correlation between stock and oil prices.
In your blog post, Bernanke noted the connection forwards and backwards might be volatile, but, overall, it’s better recently.
Bernanke decreases the relationship into different components. First, he raises among the theories behind the move: that oil and stocks are continue concerns over global growth.
This pans to some extent, since the correlation between share values and demand for oil is larger when compared with correlation for share values and oil overall.
“That’s consistent with the undeniable fact that when stock traders react to a modification of oil prices, they are doing so definitely not because the oil movement is consequential by itself, but because fluctuations in oil prices function as indicators of underlying global demand and growth,” Bernanke said.
But that explanation doesn’t give to us the entire picture, since the correlation between stocks and oil is positive beyond just the demand component. That led Bernanke to put forward another theory.
“Another possible cause of the positive stocks-oil correlation draws on the observation that recent market moves are actually together with elevated volatility,” he was quoted saying. “If investors retreat from commodities in addition to stocks much more high uncertainty and risk aversion, then shocks to volatility may be one other reason for your observed tendency of stocks and oil prices to move together.”
But he notes even that doesn’t fully consider the relationship.
Generally speaking, oil and share values tend to historically haven’t much correlation. Lower oil prices tend to mean lower costs for a lot of businesses from energy space, and for that reason following a delay, lower oil prices should mean higher stock values.
But as Bernanke while some have noted, oil prices and stocks have observed a growing correlation previously 2 decades, which has many market watchers rushing to explain what’s going on.
Unfortunately, after mentioning plenty of good points concerning the changes that have brought the marketplace to where it’s today, Bernanke admits there are some unexplained factors which can make the correlation a mystery.
“There are lots of other explanations that may be investigated: for instance, the possibility that declines in oil prices, even if initially because of higher supply, affect global financial conditions by damaging the creditworthiness of oil-producing companies or countries,” he was quoted saying. “This topic is a really worth revisiting.”
