Both U.S. and overseas stocks have been rallying since their ugly August sell-off.
But, if these key commodity prices tank, expect stock prices to follow.
Oil and copper hold the keys to the future of stock prices.
A Blueprint for Disaster
Generally, stock valuations are a function of earnings and interest rates.
How much a company has earned historically, what its earnings are today, and what its future earnings prospects are – relative to its share price – are key valuation ingredients.
Interest rates also are crucial determinants of valuations in both individual stocks and the overall market.
And with good reason.
There are many interest-rate-influenced factors that can affect the valuations of individual stocks and the broad market. There's the interest rate a company pays on its debt, what its dividend yield is relative to its peer firms, and the overall market and what competition bonds and other fixed-income investments pose.
Sometimes, however, interest rates and earnings just don't matter. That's because stocks and markets can get hijacked by outside forces, like commodity prices.
Investors who don't understand that forces like the prices of oil and copper – which may not be raw inputs or have anything whatsoever to do with a company's business – can move stocks better learn quickly what to watch and why.
Or they'll get blindsided fast.
Right now, the price of oil is extremely important – even critical – to the markets.
While falling oil and gasoline prices are considered good for consumers and economic growth in the long term, there's another side to this story. In the short run, if oil prices were to drop back to their recent lows, stock prices would immediately start to skid.
And if oil downright collapses, stock markets all around the world will tank.
With declining oil prices, it's what's playing out behind the scenes that matters most.
Let me show you…
When oil falls, it's from lack of demand, oversupply, or both.
And right now, it's both.
When oil demand starts growing at a slower rate, it's a sign that economic growth itself is slowing.
That's happening now.
According to a brand-new report from the International Energy Agency, global demand growth is expected to slow from its five-year high of 1.8 million barrels a day this year to 1.2 million next year – which the IEA says is "closer towards its long-term trend as previous price support is likely to wane."
Recent reductions in global growth forecasts are having an impact, the IEA report says.
At the same time demand is easing, oil supplies keep increasing. The U.S. Energy Information Administration's newest outlook – released this month – says "global… production continues to outpace consumption, leading to strong inventory builds throughout the forecast period."
Global oil inventory builds in this year's second quarter averaged 2.3 million barrels per day, compared with increases of 1.8 million barrels a day back in the first three months of the year.
Slowing economic growth, as evidenced by slowing demand growth for oil, isn't good for stocks.
What's worse, if the price of oil tanks, the banks that have huge loans out to energy companies will get hit.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.