Why Isn't Lower Oil Helping Stocks?

Why isn't lower oil helping stocks?

Oil drops 3.5 percent on continuing bearish comments from Goldman Sachs, and on reports Saudi Arabia cuts production by 500,000 barrels a day on lack of demand. Saudi Arabia had increased production recently but reports of slack demand is not being greeted kindly by the stock market.

But lower energy costs are good, right? Alcoa specifically cited higher energy costs as a problem. So why isn't lower oil helping stocks?

Yes, lower energy costs are good, but when the reason might be lower demand...it implies lower growth everywhere. Goldman Sachs reiterated this morning that "the oil market has adequate inventory and OPEC spare production capacity to avoid the degree of physical tightness experienced in 2008 well into next year."

Problem is, no one is lowering earnings estimates...yet. The issue of lower than expected growth still remains a source of anxiety rather than a clearly documented fact.

Still, expectations are in the process of being...re-evaluated.

So here's what might happen: U.S. — and global — GDP grows lower than most expect. Let's say we get 2.8 percent GDP growth, rather than the 3 to 3.5 percent most are expecting. S&P earnings expectations go from, say, $96 to $93.

BUT, interest rates go up much less than many hawks are expecting...say, the 10-year yield goes from 3.5 percent to only 4 percent by the end of the year, rather than 4.5 or higher some are expecting. Under this scenario, stocks will be hard pressed to break out to new highs, but the lower rates and lower commodity prices will be a break on runaway inflation.

In other words, sideways.

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