The Stock Market & Oil
By Invictus - January 23rd, 2011, 10:52AM
I’ve been wondering recently at what point the price of oil might have the potential to impede the advance of the S&P 500, figuring that sooner or later the market would have to take notice. So it was off to FRED to see what history might teach me. I confess I was a bit surprised by what I found:
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Based on what I found, I’d have to conclude that whatever correction we get in the stock market — which of course must come sooner or later — will likely not be triggered by the price of oil, as the market’s multiple in OILPRICE is about on par with its historical average and well below the peak we saw in 1999-2000.
UPDATE: For those in comments mentioning “rate of change,” here’s year-over-year for WTI (currently 19.8% and rising):
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January 23rd, 2011 at 11:45 am
I think you have it backwards, BR. Think about this one again.
January 23rd, 2011 at 1:17 pm
The 1999 peak in the chart was a period of very low oil prices, only $12/bbl or so. So the extreme spike in the chart reflected low inflationary pressure from crude oil, not high pressure.
On the other hand, the 1990 and 2008 stock market dips (and recessions) coincided with oil price spikes.
The current position of the chart is indistinguishable from these previous two oil-shock bear markets.
Bearish as hell.
January 23rd, 2011 at 2:22 pm
People tend to be far more sensitive to rate of change than they are to level; this coupled with recency effect explains why changes in general price level (inflation/deflation) as well as change in specific price series such as oil are typically ignored (or at least do not shock) until they accelerate.
Stephen Leeb’s quote in the leed suggests this with terms such as “large spike” and his implicit indicator “[W]henever Oil prices rise about 80% from year ago levels, a fair chance does exist that a recession/bear market will follow.”
The current rate of change in oil price does not appear to [ahem] rise to that level but I haven’t analyzed it closely.
January 23rd, 2011 at 3:09 pm
There was an interesting related piece on Econbrowser the other day that’s worth a read:
“Oil shocks and economic recessions”
http://www.econbrowser.com/archives/2011/01/oil_shocks_and_2.html
and another here:
“Worrying about oil prices”
http://www.econbrowser.com/archives/2010/12/worrying_about.html
January 23rd, 2011 at 3:24 pm
RW is right that rate of change is more important than the absolute level.
Consult the subheading titled ‘Inflation Environment’ in Chapter 8 of The Research Driven Investor by Timothy Hayes — most of the models compare an inflation indicator to its moving average, or examine its rate of change, and correlate it to subsequent stock price changes.
Rising oil prices, rising bond yields, rising gold prices — they’re all negative for stocks. And we’ve got all three.
January 23rd, 2011 at 5:28 pm
From the EIA:
http://www.eia.doe.gov/emeu/cabs/World_Oil_Transit_Chokepoints/pdf.pdf
A little food for thought.
January 24th, 2011 at 11:50 am
The first thing that jumps out from those charts is that oil price spikes are very closely related to recessions. history bears this out: since industrialization, every large spike in energy prices caused a recession. There may be other causes to recessions, of course, like when bankers and realtors collude to steal $2 or $3 trillion. But nearly every economy in the world depends in some way on oil.
If you double the cost of oil, the only people in the world that will not suffer is the people who own oil wells. And even those people will grumble a bit when their servants start to die off in food riots.
January 24th, 2011 at 2:04 pm
Given the recent anomaly in WTI prices, can you do a similar chart based on Brent? Thx.
Invictus: The St. Louis Fed apparently does not track Brent, or I would be happy to. If I can find it elsewhere and run the chart, I’ll give it a go.