Are Stock Market Returns Really Linked to Crude Oil Prices? - Chart Of The Day 11 October 2018 - Equitymaster

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Are Stock Market Returns Really Linked to Crude Oil Prices?
Oct 11, 2018

Almost every time, a rise or fall in the stock markets is invariably linked to crude oil prices.

Logically, it seems right too. Rise in crude oil increases input costs for dependent firms. It also means rising inflation. Rising inflation means rising interest rates.

It also puts pressure on the government to cut excise duty, thereby impacting its revenues. We have already seen that happening. After all, there is an election year coming up.

But has it really affected the stock markets?

In the short-term: Yes.

But in the long run, as we can see, Sensex returns have been independent of crude oil prices or even positively co-related!

Crude oil prices doubled from US$ 41 in December 2008 to US$84 in April 2010. In the same time, Sensex also doubled from 8,800 levels to 17,600 levels.

So, please don't fret unnecessarily about crude oil.

Check if your business has a moat that helps it pass on input price increases to its customers.

In the long run, they will survive and also gain market share from those that can't pass on prices.

Short term pessimism due to rising crude oil prices provides a buying opportunity in these stocks.

Focusing on quality stocks rather than crude oil will matter more in the long run.

Data Source: BSE, trading economics

This Chart Of The Day was published in The 5 Minute WrapUp - The 4 Categories of Investors... Which One Are You?

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