Why are stocks ignoring oil’s bear market?
Unlike in 2014 and 2016, the market doesn’t care about plunging oil prices
There are several potential reasons investors are shrugging off the drop in oil prices, reports Bloomberg.
During the most recent previous bear markets for oil, they were coupled with a slowdown in demand from China.
Another simple factor is that the bear market which ended last year wiped out a lot of energy companies’ valuation, shrinking it down to less than 6% of the S&P 500, versus 11% three years ago, according to Bloomberg.
There is also less systemic risk associated with the lower prices now. The correlation between the high-yield bond market and crude has fallen to 0.32, versus a peak of 0.87 in early 2016.
“The backdrop for oil prices is very different,” Sean Darby of Jefferies Hong Kong wrote in a report Thursday. “There has been significant improvement in balance sheet repair in 2016 through capital raisings while many producers hedged production as oil prices rose.”