The Wall Street Journal yesterday reported that oil and stocks are working together closer than they have in twenty-six years.
Oil and stock markets have moved in lockstep this year, a rare coupling that highlights fears about global economic growth.
As oil prices tumbled early in 2016, global equities recorded one of their worst-ever starts for a new year. On Monday, oil and stocks were lower again. The S&P 500 index was down 0.7% in midday New York trading, and Brent crude futures, the global benchmark, were down $1.37 a barrel, or 4.3%, to $30.81. That followed a joint rebound on Friday.
The correlation between the price of Brent and the S&P 500 stock index is at levels not seen in the past 26 years. January isn’t over yet, but over the past 20 trading days—an average month—the correlation is 0.97, higher than any calendar month since 1990 . . . .
And today, stocks rebounded with the 3.4% increased in the price of oil to $31.38 a barrel. And yeah, that's still low.
The correlation may not be a strong as reports indicate, though. Some reports suggest that the correlation is not nearly as close as it seems. As this analysis explains, "[e]ven if correlations between assets are trending higher that doesn’t mean that the outcomes have to be even remotely similar. While stocks are down around 8% this year, oil has fallen nearly 20%."
There is some indication that oil and stocks now tend to correlate, even though for a long time, stocks and commodities seemed to operate independently. According to this 2012 study,
The changes in commodity price correlation and volatility have profound implications for a wide range of issues, from commodity producers’ hedging strategies and speculators’ investment strategies to many countries’ energy and food policies. We expect these effects to persist so long as index investment strategies remain popular among investors.
It's hard to predict what this correlation can mean, or whether one is driving the other. Certainly a spike in oil supply demand could cause an increase in oil prices, and that demand would like help support the stock market. But oil prices could stay low, and we could still see the market go up if other indicators make investors happy.
One correlation that it seems you can always count on: low oil prices means more car and truck sales. And by that, it usually means SUV and truck sales.
Sales of trucks and sport utility vehicles are rapidly outpacing sales of all other vehicle types in the U.S. as consumers ditch four-door sedans and flock to a seemingly endless selection of small, midsize and gargantuan SUVs. According to 2015 sales data released by the world’s top automakers on Tuesday, trucks and SUV sales dominated last year.
We'll see how long it lasts. As they say, the cure for low prices is low prices, and the cure for high prices is high prices. For now oil and gas are low — the market will fix that one way or another soon enough.