What happens to equities when crude heads south?

Equities generally tend to do well getting into September, as the restocking is happening to the Christmas holiday period. However this time around - there is one overarching worry - which is crude. Crude is again looking weak right now- with Chinese restocking out of the way and the supply numbers looking worrisome - the expectations are for a weaker crude. Now - there are tons of factors which can drive crude, so it is difficult to get a handle on the crude price. However one thing which you can observe is that when the price of crude goes low (say below 40) - the equities start getting correlated to crude. The probable reasons are weaker economic activity in the short run, lower capex, potential of economic disruption because of bankruptcies, impact on the financial system, impact on the energy sector (as crude competes with solar/wind/gas), spillover effects from the energy supply chain into other industries. In addition weaker crude should be net positive for the world economy, however weaker crude does not translate into higher economic activity in the near term, as new capex will not take place immediately for industries that now can sustain by the new lower crude price (expectations are for the crude prices to increase anyways). 

Hence there is only downside as crude prices start heading lower than upside. We saw that earlier this year, when crude fell below 30, the equities markets were very nervous. It depends on your views on crude now - if it looks like it breaks 40 on the way down, you can consider a short view on equities. The first rule in finance is risk reward, and as crude goes lower, there is added risk and little reward (as we argued earlier), it is a no-brainer.