Stocks shrug off oil drop as Dow tops 18,000 for first time since July
No deal in Doha from major oil producers this weekend to cap crude production pushed oil prices down Monday but stocks shrugged off the negative news in the energy patch as Wall Street kicked off the week that will be dominated by earnings reports from 20% of companies in the Standard & Poor's 500 index.
A hoped-for deal to cap oil production didn't happen Sunday, as Saudi Arabia was unwilling to strike a deal unless Iran was part of it. The lack of a deal took down prices of U.S.-produced crude to end down 1.4% at $39.78 a barrel after plunging more than 7% earlier in the day. Oil prices have rallied more than 50% since their lows in February amid hopes of a deal getting done in a world still awash with oil.
Doha talks fail to reach oil production freeze
The hit to the U.S. stock market was brief. The Dow Jones industrial average, which was down about 50 points at the open of trading, quickly turned higher and ended the day and ended the day up 107 points, or 0.6%, at 18,004, closing above 18,000 for the first time since July 20, 2015. The broader Standard & Poor's 500 stock index was up 0.7% to 2094, threatening to top 2100 for the first time since Dec. 2. The Nasdaq composite index rose 0.4% to 4960.
Energy stocks, which were hard hit in pre-market trading, also rebounded. Vanguard's Energy ETF (VDE) turned positive and was up 1.6%, after being down 2.5% minutes before the opening bell.
While Wall Street was hoping for a deal, the hit to stocks was only temporary as some of the over-production issues have been dealt with already due to the steep drop in oil prices earlier this year which forced out some producers and lessened some of the supply-demand imbalances.
The stock market’s ability to shrug off the lack of a deal to cap oil production is a sign that oil may no longer have a stranglehold on market sentiment. What’s more it is a sign that stock investors see better days ahead and remain convinced that the stabilization in oil prices will stick as normal market forces adjust to the oil supply glut.
“The oil market is responding to stabilizing forces and the supply/demand imbalance is gradually curing; time and economic forces work,” David Kotok, chief investment officer at Cumberland Advisors told USA TODAY. “It also seems like markets are saying that the outlook for earnings and the economy will improve.”
A still-low interest rate environment as the Federal Reserve holds off on its next hike is also giving stocks a boost, adds Kotok.
Jim Paulsen, chief investment strategist at Wells Capital Management, says Wall Street has already sniffed out that oil prices have started to rise without any agreement.
“Most realize that oil prices and other commodity prices that are most sensitive to economic growth have already been rising without any supply agreement,” Paulsen says. “That must mean demand is improving sufficiently that oil and other commodity prices are likely to keep rising whether or not producers agree on anything.”
Paulsen also says investors realize that stocks are moving higher and are making a run at last year’s record highs.
“They don’t want to miss out if the stock market does ‘break out,’” adds Paulsen.
It's likely that earnings will emerge as the key driver of stock prices this week, as 102 of the 500 companies in the S&P 500 report first-quarter results this week. Heading into the week, Wall Street was forecasting a 7.8% contraction in earnings, so any signs that that things aren't as bad on the profit front could give stocks a lift.
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