As oil prices tumble, stocks have followed.
The relationship between crude and stocks, which has taken center stage in this tumultuous new year, is “unwarranted,” Citi chief U.S. equity strategist Tobias Levkovich said Monday
“I think the relationship between oil and the markets are overdone and I think the reason that people focus on it is they’re thinking about it as a measure of global economic activity, which isn’t really fair given what’s going on in terms of supply and demand disequilibrium, which would put out more supply than demand,” he told CNBC’s “Worldwide Exchange.”
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Levkovich sees the drop in oil prices as a benefit to the overall economy: “Lower oil prices are an energy ‘tax benefit’ for far more people than a specific bad for certain economies and certain countries.”
The economic impact of lower oil prices is also misread, Levkovich argued. “What most people don’t understand is the benefit of lower energy prices or the detriment of much higher energy prices take about 18 months to work their way through the economy.”
“So there was this perception, for example, that as oil prices fell, you’d get this big consumer boost right away that would offset some of those negatives,” he added.
In his weekly market note, Levkovich said the energy sector will account for less than 5 percent of 2016 S&P 500 profits, and that proves the focus on the sector is misguided.
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As for equities, Levkovich sees the market going higher with a 2,150 price target on the S&P 500. Based on Friday’s close that would be a 12.8 percent increase.
Tobias said there are two factors driving this view: “Our panic-euphoria model is giving us a 96 percent probability of a higher market a year from now.
“Similarly our normalized earnings yield guide,” he continued, “is also signaling about a 93 percent chance of higher markets in a year.”