Impact of oil prices on the stock market is inversely proportional. A shoot in oil prices leads to a nose dive in the stock market. And a decrease in oil price on an average leads to a higher stock market return. So, the effect of oil prices becomes predictable in the stock market. The effect is profound when the oil prices increase in the magnitude of 50% to 100% annually. The reasons being:
1. Any movement in the oil prices results in uncertainty in the stock market.
2. Higher the oil prices, higher the transportation, production and heating costs.
Say, a decrease in the oil prices by 10% in US will result in the expected return to double up on the stock market in the following month. The waves of the impact on the world market index will make its presence felt significantly. Though the stock market moves in the opposite direction with respect to oil prices, it is basically a one way traffic. The stock market returns has no impact on the crude oil prices.
The entire stock market does not get equally or at the same time affected by the fluctuation in the oil prices. It is rather subtle. The US industrial sectors that get most affected with rise in oil prices are:
1. The cyclical Services sector gets most negatively influenced. They constitute the general retailers, support services, media, entertainment, leisure, hotels and transport.
2. The sector which follows next in order is Cyclical Consumer goods. These include household goods, textiles, automobiles and parts.
3. The next negatively influenced sector is the Financials. They comprise of investment companies, banks, life, assurance, insurance, real estate, specialty and other finance.
During an oil price rise, it is advisable to hold on to energy stocks shift focus from the mass market general retailers. It is a rather straight forward approach. Rising oil prices results in the escalation in the prices of fuels and lubricants along with passenger transport mediums either by road or air. For example, it takes a cup of crude oil in the production of the plastic for a single disposable nappy.
With the gradual fading of the interest rates and the rapid diversion of the disposable incomes in catering to the ever rising household energy bills, there is actually little scope for any discretionary expense on the high street. That is the reason why mass market retailers ought to be avoided with respect to stock investments