Much ink has been spilt over the leakage of collapsing crude prices into wider markets.
A new note from Morgan Stanley analysts led by Chief Cross-Asset Strategist Andrew Sheets demonstrates the degree to which the fortunes of the energy sector are currently driving stocks and bonds, but emphasizes the correlation is overdone.
Stripping out the impact of the energy sector reveals a far different picture for industrial production, corporate earnings, and inflation around the world.
"Oil’s role in driving hour-by-hour market moves is overstated. But its place in the broader macro debate remains central," write the analysts. "Energy companies are no longer leading equity or credit indices higher or lower. In our view, oil and markets are moving together because they are driven by similar things: concerns over growth, a lack of risk appetite, [and] a relentlessly strong trade-weighted dollar."
U.S. industrial production has slipped in recent months, with some economists interpreting the decline as a sign of impending recession. Removing the effect of energy, however, and the fall in industrial production disappears faster than an East Texas jackrabbit.
"Lower oil prices have clearly not been the economic boon many had previously assumed," notes Morgan Stanley. "But it is also important to recognize that many 'broad' measures of economic health, such as U.S. industrial production, can be significantly affected by weakness in oil."
While earnings growth for the benchmark S&P 500 Index is forecast to come in negative year-over-year and earnings growth for the MSCI Europe has been stagnant for an astonishing 48 months, the picture brightens considerable once energy is taken away. Excluding the sector, year-on-year earnings growth in both the U.S. and Europe reach 5 and 4 percent respectively.
"We commonly hear that corporate earnings are 'rolling over,'" write the analysts. "It may be more accurate to say that commodity sector earnings are collapsing, while profits for the remainder of the market are still posting moderate growth."
A similar trend can be observed when it comes to inflation, with energy exerting a significant downwards impact on price measurements. A look at inflation in the U.S., Europe, and Japan excluding the impact of food and energy—the core Personal Consumption Expenditure (PCE) price index in the U.S., core Harmonized Index of Consumer Prices (HICP) in the eurozone, and 'core-core' inflation in Japan—shows price increases trending upwards over the past nine months.
In what must be music to Federal Reserve Chair Janet "transitory" Yellen's ears, the analysts write that: "Deflation fears, in our view, are hard to square with ongoing resilience of core inflation measures."
Of course, it all amounts to a somewhat academic exercise given, you know, the actual existence of the energy sector and its newly-outsized influence on the overall economy.
Still, Sheets & Co. emphasize that the day-to-day movements of markets have perhaps become over-reliant on the short-term moves in energy, even though they may all be speaking to the same concerns; namely a slowdown in economic growth, an increase in risk aversion, and a resilient U.S. dollar.
"Declines in industrial production, corporate earnings and inflation are all concerning signs for the health of the current cycle," the analysts conclude. "But given how negative current sentiment appears to be, it is also worth considering if, and how, they could be misleading."