Q: Why does the price of oil seem to have such a big influence on the stock market?
A: Our nation relies heavily on oil and other fossil fuels. And that is reflected by the stock market.
When oil and gasoline prices rise, consumers feel the hit almost immediately. Suddenly, they cringe as they see the numbers on the pump spin. With gasoline eating up a bigger piece of consumers' budgets, they're forced to cut back in other areas. That's a big reason many retailers and other consumer discretionary companies, including restaurants, are feeling a pinch. And that's been reflected in the share prices of those companies.
But it's not just consumers who suffer from higher energy costs. Companies, too, are hit with what amounts to a huge tax increase — except they don't get any additional services in return.
Higher fuel costs obviously hurt airlines, trucking companies and producers of products that use petroleum as a raw material. But even companies that need energy to produce their products are pinched.
In some cases, companies can pass along the higher costs to their customers by increasing fees or prices. But in many cases, for competitive or other reasons, they can't. Then, the increased cost of fuel or energy eats into their profit. The stock market takes all this into account, and pushes their stock prices down.
And, because investors try to be forward-looking, they don't wait for the effects of higher oil prices to take hold before they sell. They dump stocks as soon as they see oil heading higher. And the higher it goes, the more stocks they dump.
Why? The hit on companies and consumers from higher fuel and energy prices can become so profound that the whole economy starts to slow down.
So, as you can see, higher energy costs cause numerous problems for investors. That's why Wall Street, as well as Main Street, is hoping oil prices finally stop rocketing and settle down.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org. Click here to see previous Ask Matt columns.