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Rekenthaler Report

Do Declining Oil Prices Signal a Problem for Stocks?

They have not generally, but that might be changing.

The Question
On Jan. 21, former Federal Reserve vice chairman Alan Blinder asked the obvious question: Since when is cheap oil a bad thing?  One would think that it's positive news for a vital commodity to become readily available. True, those countries that export the commodity will lose revenues, but the world overall will gain wealth. Yet in recent months the major stock markets of the United States, Europe, and Japan--all net importers that would seemingly enjoy the full benefits of oil's price decline--have slipped when oil prices have declined.

This has happened, says the Wall Street consensus, because oil prices are the canary of the global economy's coal mine. If they are slumping, that indicates slack demand and upcoming economic woes. Most Wall Street economists have therefore been downgrading corporate earnings forecasts and upgrading their probability of a U.S. recession.