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Conventional understanding is that a fall in crude oil price increases the purchasing power of consumers and is good for the economy and the stock market. But that doesn’t seem to be happening anymore. High positive correlation between oil prices and stock market movement, especially in the US, in recent times has left analysts puzzled.
While the reason for this needs deeper examination, as it is likely to affect asset allocation in the near to medium term, various explanations are being put forward at the moment. For instance, it is likely that both oil and stock markets are reflecting the same demand conditions and possible risks to global growth. It is also possible that stock markets are worried about losses being suffered by listed companies in the commodities business in general and their implications on the banking sector.
Naturally, clarity on the exact reason will give a better idea of how long both markets will mirror each other and what it means for the world.