There are winners and losers in change in the price of oil. Oil prices are the building blocks of the global economy and is of overwhelming importance in the functioning of the globalized world. So, change in oil prices have a serious impact on the stock market of United States. Low prices of oil are beneficial for the Americans with low income and for companies as well as it reduces the cost of inputs and facilitate higher consumer spending. This appears that sinking oil prices will be a boon for the stock market of America as well as for the stock investors. However, this is partially true. Oil sends ripples through the stock market. The impact of oil is not in one direction but has multiple folds which is not easy to understand. The reaction of stock market of United States to a change in oil prices highly depends whether that change in price is caused by demand side or supply side shocks in the oil market.
Effect of Plunging Oil Prices
The stock market of United Stated generally responds favorably when there is a reduction in the oil prices. It is starting to track the path of oil prices because the stock market has realized that the price of oil is a measure of the overall health of the American economy. Energy companies only face the negative impact of the fall in the oil prices as it reduces the profits of the oil companies. The most affected companies from change in oil prices are the energy companies , as with the slump in oil prices, these companies can lose major chunk of business and their stocks will follow a decreasing trend thus badly affecting the stock investors. This is because that the price of oil in the market will be lower than the cost which is required to extract it. So, a decrease in oil prices will negatively affect the stock market and the returns to stock investors will go down.
According to the details the stock prices of the major companies have suffered badly in last six months of the 2014.The stocks of the major companies such as Exxon Mobil, Chevron and Halliburton lost value of about 6%, 6% and 40% respectively in these six months.
Stock prices tend to follow oil prices when people are nervous about the economy. And that’s been the case for the past few years. Right now, the drop in oil prices appears to be happening on account of worries over global growth. Those same fears have spooked the stock market. The fact that they are moving together means that, despite 4% growth in GDP in the second quarter and generally positive jobs reports, investors are still nervous about the U.S. economy
In this situation investors can protect themselves by diversifying their portfolios or by moving their investment from stocks to the bank. This will help to increase the investors return in order to protect them from return losses from the energy companies.