Oil Prices Falling amid US Stock Market Records

6 apr 2021

On Monday, the markets worked out the last week events. As a reminder, on Thursday, OPEC Plus agreed to increase production by 350,000 barrels per day in May and June and by 400,000 barrels per day in July. On Friday the NFP figures showed an increase in new jobs outside agriculture by almost a million.

We noted that the OPEC Plus decision is definitely bearish. The fact that oil did not fall immediately on Thursday in no way canceled the basic economic laws: an increase in the supply of an asset is a reason for a decrease in its price with constant demand. So the 5% drop in oil yesterday was no surprise to us. But rather, on the contrary, it became a logical and natural reaction. Moreover, there were enough problems on the demand side lately. The number of new cases in India per day has exceeded 100K and the situation is rapidly deteriorating.

And then Iran is trying to negotiate with the United States on the nuclear deal and lifting of sanctions. If the negotiations are successful, then an additional 2 million b/d from Iran could pour into the market. In general, everything looks rather gloomy for oil.

In contrast to the oil market, optimism continues to reign in the US stock market. The Dow and SP500 have renewed their all-time highs again. The reason is the excellent figures for the US labor market. According to official figures, 42% of US firms opened vacancies in the past month, and 56% of owners said they hired workers or tried to hire them in March. These are record values ​​in the entire history of observations. Nearly a quarter of those surveyed plan to create jobs in the next three months, the second highest since 2018.

In general, the next month or two will most likely be accompanied by new growth records for the US economy. So the bubble in the US stock market has every chance to continue to inflate.

But don't forget about the clouds on the horizon. According to research results, tax increases have an extremely negative impact on the dynamics of the US stock market. There have been 13 episodes of tax increases in the United States over the past 100 years (with the most recent in 1993). During these periods, key US stock indices added 2.4% on average in the year of tax increases, and declined 0.9% on average the following year. At the same time, the average historical growth rate of the US stock market was 7.7% per year.