Earlier this week, I warned Crush The Street viewers to the fact that crude oil futures signaled heavy deflationary pressures. Like clockwork, “black gold” prices tumbled on Monday’s session, followed by another sharp selloff on Tuesday. Such negativity confirms what many investors fear: we’re on the precipice of a severe market crisis.
Of course, if you’ve been reading our reports from top financial and investment analysts, you’ll realize that this volatility has been a long time coming. Nevertheless, the market crisis just got real, as the kids like to say. After Tuesday’s closing bell, the crude-oil sector finished a historically bad season.
According to Yahoo Finance’s Heidi Chung, “Crude oil fell for twelve straight sessions on Tuesday – its longest losing streak in history.” Chung further writes:
The commodity is still firmly in a bear market, or down more than 27% from the highs it hit in early October. Oil was down nearly 7% and had its worst day in three years. WTI crude oil settled at $55.69 per barrel.
While the current oil market crisis is a worldwide headwind, the U.S. is feeling a more pronounced pain. The international benchmark Brent Crude Oil has dropped 16.3% since the beginning of October. In contrast, the domestic index West Texas Intermediate is down 24% over the same timeframe.
How the Market Crisis Can Quickly Escalate
Cynics may point out that oil-price deflation may not necessary lead to a broader market crisis. For instance, the major indices such as the Dow Jones or the S&P 500 didn’t collapse like energy prices did in 2014 and 2015.
But as a counterpoint, crude oil represents real-time consumer demand. One of the reasons – besides gouging – that prices at the pump increased earlier this year was a robust labor market. People enjoyed greater employment opportunities, and therefore, spent on commodities like gasoline.
What falling oil prices tell us is that gasoline providers can’t sell to consumers at prior elevated levels. They must keep dropping the price lower. But because the decline has been so severe, this indicates that the consumer sector isn’t as healthy as advertised.
For now, Wall Street operates business as normal. But once enough investors freak out over the oil deflation, a broader market crisis can quickly ensue. Certainly, with the U.S. October budget deficit jumping past $100 billion, we’re not necessarily well-equipped to handle a sudden correction.
Obviously, you don’t want to overreact. However, the threat of a market crisis is real enough that you’ll want to consider a protective stance.