Oil and stock prices have been intertwined of late. But that’s not the norm.
Stocks have bounced back in the last few trading days, and many believe it’s because oil prices have finally risen from 14-year lows. Prior to that, tumbling oil prices were deemed the main culprit behind the months-long stock-market slump.
Many of the mainstream media outlets blaming oil for all the market’s woes (I’m looking at you, Yahoo Finance) say it as if oil and the stock market have this long history of moving in tandem—like falling oil prices is inherently a reason why stocks might fall. Nothing could be further from the truth.
Take a look at this 10-year chart comparing the movement in the S&P 500 vs. the movement in oil prices:
Not a whole lot of correlation there. When oil prices fell off a cliff in 2014, investors didn’t seem too worried about it. Conversely, when oil prices spiked in mid-2015, stocks hardly budged.
Since then, there’s been more overlap. But that’s the exception, not the norm—at least in the past decade. When crude oil prices rose to record heights in 2008, it wasn’t exactly good for stocks. Oil prices didn’t come crashing back to earth until well after the market collapse—and the global recession—were almost a year old.
Logically, that 2007-2008 gap between oil and the stock market made a lot more sense than today’s hand-in-hand movement does. High oil prices are bad for the economy; when folks are paying $4.00 a gallon for gas they’re invariably spending less at restaurants, on clothes, toys, new iPhones, etc. It’s also bad for airlines, package delivery companies such as UPS (UPS) and FedEx (FDX), and retailers such as Wal-Mart (WMT) since fuel costs are a major part of their overhead. The only sector that truly benefits from high oil prices is energy.
The opposite is true when oil prices are low, as they are now. When you’re paying less than $2 a gallon for gas, you have a lot more disposable income. And that benefits all sectors of the economy (except energy, of course). So, it stands to reason that stocks should thrive in a low-oil-price environment.
It clearly helped in 2014, when stocks rallied for a fourth consecutive year just as oil prices were plummeting to a pre-recession low. It also helped in 2006 and early 2007, as the S&P 500 took off just as oil was in steep decline.
And this isn’t just a 10-year phenomenon. Look at what happened to stocks back in 2002-2003, when crude oil doubled in price from $20 to $40 a barrel:
So why are oil and the stock market so seemingly intertwined now? As I wrote a couple of weeks ago, I think it’s more coincidence than any deep underlying reason. Low oil is being blamed for keeping stocks down, but really there are myriad reasons why stocks have faltered: China, the Fed, Donald Trump, or, most likely, a natural correction phase after years of uninterrupted gains.
Eventually, stocks will get going again—with or without oil. The market’s fate isn’t dependent on how quickly oil returns to $80 or (perish the thought) $100 a barrel again. They seem to be trading in tandem right now, and have for the past few months. But claims that low oil is the No. 1 thing weighing stocks down are misleading, irresponsible and downright lazy.
Oil and the stock market usually don’t rise and fall together. Years of history tell us this. If you wait for oil prices to spike before you buy stocks again, you may miss out some huge returns.