On Sept. 16, the U.S. stock market plunged following an abrupt increase in the oil price, sending the Dow Jones down by more than 140 points in a single session. Ironically, China, whose economy has been on a decline in recent months, could prevent the U.S. stock market from a larger pullback.
The U.S. and China need to work together to provide lifeline to stock market
The unexpected drone attacks on Saudi Arabia’s major oil processing plant has left some of the world’s largest economies including the U.S. and China in disarray. China in particular, as the largest importer of oil in the world, will soon have to seek alternative sources of oil if the Aramco facilities in Saudi Arabia struggle to recover.
— Charlie Bilello (@charliebilello) September 16, 2019
Consequently, the U.S. stock market saw its recent momentum dwindle as the Dow Jones ended its two-month-long win streak.
However, Doug Cote, chief market strategist at Voya Investment Management, said that several years ago, such an incident would have triggered a 5% drop in the stock market, emphasizing that the U.S. stock market has grown to become more resilient in the past two to three years.
“A short few years ago the market would have been down 5%. People should take that as a sign of how resilient the market its. Any good news, and this market could rip up,” he said.
One of the key catalysts behind the recent momentum of the U.S. stock market has been the progress in the trade talks between the U.S. and China following U.S. President Donald Trump’s rare move to delay the imposition of tariffs on Chinese goods.
Facing slowing economic growth as a result of the trade war and uncertainty in the global economy, China has an incentive to seek a partial trade deal with the U.S. while a trade deal for the Trump administration would significantly improve the sentiment around the stock market, setting a better mood ahead of the re-election campaign.
The surge in the oil price may have established an environment in which both the U.S. and China are now encouraged to create a partial deal amidst the next round of trade talks to lessen the effect of the oil price on two of the largest economies in the world, which could lead to swift recovery for the stock market.
Some strategists like David Kudla, the CEO of Mainstay Capital Management, suggested that the potential impact of the rise in oil prices may have been overstated and that consumers are unlikely to take notice in the short term.
“Higher oil prices? $60 to $65 is not high. Certainly not by historical standards. Consumers will barely notice it at the gas pump before it comes and goes,” he said.
As a partial deal between the U.S. and China becomes more of a given in the current state of the stock market, another catalyst that could raise the sentiment around the stock market is the growing talks around a potential rate drop by the Federal Reserve.
The Saudi Arabia oil attack increased geopolitical risks, particularly in the global oil market, and with the trade war still technically ongoing, strategists anticipate the Fed to consider a new round of easing.
Jim Bullard, president of the St Louis Fed, said that it is a “good question” to ask whether the Fed has done enough to stimulate the economy considering the growing uncertainty in the global economy.
“Whether we’ve done as much as we need to here is a good question. But I think we have taken this on board, for sure,” he said.