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The Stock Market's Kryptonite

The Stock Market's Kryptonite

The stock market is all about the price of oil these days, and as gas prices go up, the stock market goes down. There were  several days where gas prices continued to go down and we saw an increase in the stock market, but hurricane Gustav has prices climbing again.
 
The reason for the inverse relationship is because as gas prices go up, consumers compensate for that in other areas of their spending. As a result, businesses have to adjust accordingly and the loss of revenue usually means the price of their stocks go down.
 
Some industries, like the airline and trucking industry, rely on oil to run their business. In some cases they can pass the extra cost on to the consumer and in some cases they can’t. When it starts eating into their profits because they can’t pass it on, that’s another reason their stock prices take a dive.
 
As investors tend to be forward thinkers, they don’t all wait to see if the price of their stocks will go down—they already know it will happen. So, as the oil prices increase, they start dumping stocks. That’s a big reason that Wall Street is hoping for gas prices to level off. It will bring a little more stability to the stock market.
 
So, now that you know why oil affects the stock market, have you seen a decrease in your portfolio because of it? What kind of strategy do you have in place to minimize your risk in this area? [USA Today]

Posted: 8/27/08