Oil falls again, stocks split three ways

Stocks pulled in three different directions on Tuesday. The S&P 500 finished essentially flat at 7,764.64, down six hundredths of a point, while the Dow Jones Industrial Average fell 185 points, or 0.4%, to 51,863.69 and the Nasdaq Composite rose 0.5% to 27,244.28. Oil kept sliding, with West Texas Intermediate crude, the main US benchmark price for a barrel, down about 2.6% to $89.67.

The day was really one story with two opposite effects. Iranian and American officials are both at the United Nations General Assembly this week, and markets read those meetings as a step away from conflict in the region that produces much of the world's oil. Notice that no extra barrels were pumped on Tuesday. What changed was the odds traders assign to a future supply disruption, and those odds are priced into crude every day, so oil can fall several percent on a conversation alone.

Cheaper oil is good news for almost every company that burns fuel or ships goods, and it is especially good news for the inflation outlook, because energy prices feed into the cost of nearly everything else. That matters more than usual right now, because the Federal Reserve raised its benchmark interest rate last week for the first time in three years, and the energy shock of recent months is a large part of why. Anything that cools oil takes some pressure off the Fed to keep raising.

So why did the three indexes disagree? Mostly because they hold different companies. The Nasdaq Composite is dominated by large technology firms, which benefit twice over when the outlook for future interest rates softens, since their value rests heavily on profits expected years from now and those distant profits are worth more when rates are lower. The Dow holds only thirty companies, weighted toward industrial and energy businesses, and an oil producer's revenue is quite literally the price of a barrel, so a falling crude price cuts both ways across the market.

The bond market declined to celebrate. The 10-year Treasury yield, the interest rate the US government pays to borrow for a decade, edged up to 4.97%. Ordinarily cheaper oil would push that down, but Fed officials have been signaling that at least one more rate increase may be needed this year, and that expectation held yields roughly in place.