Does the S&P Need Higher Oil?

By Charlie Bilello

Crude Oil is crashing again, down 36% from its high in early October.

With the S&P 500 moving lower in tandem during October (11% correction), part of the blame was placed on lower Oil prices.

If only Oil prices had not collapsed, some pundits argued, stocks would be hitting new highs. How accurate is this line of thinking? Do US stocks really need higher Oil prices to perform well?

Let’s take a look back at history…

We have data on Crude Oil (spot prices) going back to March 1983. The monthly correlation to the S&P 500 since then? Essentially zero (0.06).

There are times where Oil and equities are positively correlated and other times when they are negatively correlated.

Data Source for all charts/tables herein: Bloomberg,

During the financial crisis of 2008 and its aftermath, the correlation between equities and Crude became more consistently positive and higher than in prior cycles.

Why? A deflationary, depression-like collapse was the major fear in 2008, and lower Crude prices that year were said to be a harbinger of bad things to come. When that theory did not materialize in 2009, the opposite was said to be true. The rally in Crude was thought to be a positive, indicating reflation and stronger global growth.

But this period of reliably positive correlation was an outlier, as evidenced by the unpredictable relationship Crude and the S&P 500 has had over the longer-run:

  • From 1984-87, Crude declined every year while the S&P advanced.
  • The S&P continued to advance in 1988 and 1989 while Crude rebounded.
  • Then, in 1990, the S&P experienced its only down year in the 1982-99 period while Crude Oil was up 30%.
  • From 1994-96 the S&P and Crude moved up together.
  • From 1997-98, Crude declined while the S&P experienced two strong years.
  • The 2000-02 Bear Market in stocks displayed no obvious correlation to Crude.
  • From 2003-07, Crude and the S&P rose together during the commodities boom.
  • In the 2008 deflationary collapse, they declined together and during the 2009-11 reflation they rose together.
  • In 2014-15, as Crude has suffered one of its worst declines in history, the S&P still finished higher.
  • Then, in 2016-17 when Crude Oil rebounded, the S&P 500 continued to march higher.
  • This year, Crude Oil is down 15% while the S&P is still up over 4%.

So do U.S. stocks really need higher Oil prices to generate a positive return? The answer based on the historical evidence is a definitive no. In the last 7 years, Crude Oil has declined 47% while the S&P 500 is up over 163%. This is just one example among many where stocks have posted gains in spite of lower Oil prices.

How is that possible? Because it is not clear exactly what a higher or low Crude price means for the overall economy and an S&P 500 Index where the Energy sector which now comprises less than 6%.

Most studies show that the U.S. economy (and U.S. consumer), as a net consumer of commodities, ultimately benefits from lower Oil and Gas prices. Similarly, companies outside of the Energy spectrum benefit from lower input costs.

Ultimately, the correlation between Crude and stocks depends on why Crude is moving higher and lower, which is difficult to ascertain in the moment. It only becomes clear in hindsight. Certainly a crash in Crude as we saw in 2008 which was an indication of a collapse in global demand was not going to be a positive for the U.S. equity market. However, a crash in Crude due to increasing supply and alternative forms of Energy could very well be construed as positive for markets.

What is the reason why Crude Oil is crashing today? Again, we’ll only know in hindsight.

Ironically, while the fear of the day is over lower Crude Oil prices, historically the opposite situation has been more harmful for markets and the economy. If we look back at history, 1-year spikes in Crude above 90% occurred in 1987, 1990, 2000, and 2008. All of these spikes were associated with equity Bear Markets and the 1990, 2000, and 2008 spikes associated with U.S. recessions. So perhaps the greater fear should be not a continued slide in Crude, but a spike higher.

That is not to say that some stability or a bounce in Crude in 2019 would not be welcomed by U.S. stocks. It certainly could be if the rise was attributed to an increase in global demand. But predicting whether and why Crude rises and falls is not an easy game to play. Harder still is predicting its impact on stocks.

As Howard Marks once said: “There’s nothing intelligent to be said about the future of the price of oil.”

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