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Scary: Markets Move With Oil, Stagflation Looms

Apr. 14, 2011 1:18 PM ETUSO, CVX, XOM
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 The markets opened lower with initial weakness in oil. As the morning progressed, oil surged to the upside and the markets followed. Contrary to most retail investors thinking, weak oil is actually bad for the markets while strong oil is good. This is primarily due to the indexes being over weighted with energy and commodity stocks. When oil drops, stocks like Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) fall. They are major components of the Dow Jones Industrial Average, thus, the index is likely to be weak. When oil spikes, those stocks are strong and the Dow responds accordingly. The United States Oil Fund LP (NYSE:USO) is trading at $43.23, +0.48 (+1.12%).

In addition to oil causing early weakness, Jobless Claims were reported higher than expected at 412,000 and Producer Price Index numbers came in hot as well. The Producer Price Index for March was reported at 0.7% while the core PPI, excluding food and energy came in at 0.3%.

This is a scary thing for the markets as inflation is starting to rise but more people are filing for unemployment. The worst case scenario for the Federal Reserve would be stagflation. Stagflation is where there is inflation but no growth in the economy. Think of it this way, usually when there is inflation, there is growth in the economy so people are making more money to pay for more expensive items. With stagflation, they are not making more money and prices are going up.  This hurts the population much more.

Gareth Soloway

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