A Reminder Of How Stocks React To Oil Prices

Tyler Durden's picture

Back in Feb 2013 we introduced the "Brent Vigilantes" and reminded traders how stock markets (and macro economies) react to shifts in the oil price with the two trading together to a 'tipping point' at which point strocks belief in growth breaks. We further confirmed that this is even more worrisome in the case of an oil price shock which strongly suggests that VIX at 12 is not pricing in the volatility that we have seen in the past when the oil complex starts to shake.

We detailed in Feb 2013 how oil's trigger points drives macro weakness,

Time and again in the last few years, even as central bank balance sheets have risen inexorably, we get corrections in equity markets that bring them back to a fundamental reality, however briefly. The catalyst for those 'corrections' is hard to pin-point but a step back and we see that the flood of new money also spills out to anything that can't be printed (gold, silver, oil) and it is the latter that has a natural drag on the global economy. So, while the 'wealth' transmission mechanism is now the only policy tool left for central banks, it is the price of Oil that caps that upside thanks to its impact at the margin of a fragile global economy.




Nowhere is this more clear than in Europe, where each time Brent crosses above $120 (helped by central bank largesse), macro-economic surprises start to deteriorate rapidly and markets fade. We are close to $120 (Brent) once again now... With government bonds in US and Europe 'managed' so well, the vigilantes have left the building - and moved to the Crude oil pits... 


The same is evident in the US - with $100 WTI apparently the trigger...




Then, as we wrote in Sept 2013 how that shock shudder stocks,

The jury is still out on whether the US will attack Syria, whether it will do it unilaterally or as part of a coalition (with France), and how far crude would spike in the case of an intervention. Previously, SocGen presented some apocalyptic (if brief) scenarios that saw oil soar all the way to $150. That may be a stretch, but once the Tomahawks start flying a jump in Brent is virtually assured. Here is what BofA says on the matter: "watch for any escalation of Syria/geopolitical tensions that send Brent oil prices in excess of $125/barrel, the level in 2008, 2011 and 2012 that helped trigger a correction in equities. Historically during oil price spikes, equities have underperformed bonds, which have underperformed cash."


So what would happen to stocks? The mainstream financial media, in order to preserve a sense of calm, took the blended average of equity returns following historical oil price spikes, and concluded that it would be a manageable -2% in the worst case. However, like in the Reinhart-Rogoff case, the average calculation is a function of very disparate value, ranging from -15.5% in the case of the Iraq-Kuwait war of 1990 in the worst case, to +12.9% in the case of the Iran-Iraq war of 1980.


In other words, assuming a simple blended average return based on historical results is the most flawed approach in a military conflict that is and will be as unique, as all previous petrodollar conflicts have been in the past.

And speaking of historical results, here is what the record books say:


So the next time some talking head proclaims that stocks and oil rise together and so $120/130/140 oil is no problem for the US/EU/Chinese economy, remind them of these charts!!!

Because, as is clear below, high oil prices bleed into high gas prices and tamp the US consumer-driven multiple expansion exuberance

Each time retail gas prices have topped $3.80, valuations (Fwd P/E) have also topped - not good news for a market driven solely by hope-driven multiple expansion...


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NoDebt's picture

Well, now they have their perfect excuse for the non-bounce-back in Q2.  That was a close one.  They were almost out of ready-made excuses.

lordylord's picture

"They were almost out of ready-made excuses."

Does the government really even need excuses anymore? I bet the government could come out and say that they and the Fed have been deliberately fucking everyone for the last 100 years and 99.9% wouldn't even give a shit.

ZerOhead's picture

You are correct... sadly... "Not a shit they would give"

In the meantime what's the Q3 weather forcast for Iraq looking like?

Whootie_who's picture

If they wanted stable oil.. they should have built the Keystone XL pipeline from Canada... then they could have told OPEC to go fucj themselves ans $120/oil.... oooops he did it again

Eyeroller's picture

They could take a page from the IRS and say their computer crashed and they can't recover the data.

Billy Shears's picture

You mean they (CB) can't print oil like they print gold?

Sudden Debt's picture

Yes they can, oil started to spike when they invented the ICE

wagthetails's picture

luckily for us, stocks don't follow macros anymore.  that was a close one!

Flakmeister's picture

This is one they will have a hard time not following...

AccreditedEYE's picture

Stocks haven't traded on fundamental information in long, long time. WHy should they start now? Every "asset" calss is becoming managed. I'd rather not fight an endless wall of money.

Flakmeister's picture

I agree, going short the overalll market is a losing proposition. You have to pick and choose...

And nominal gains can be a very poor measure of real return, agreed?

Sudden Debt's picture

How did silver and gold do than? Can't throw a compaire chart on it.

CrashisOptimistic's picture

You mean a chart comparing things that matter and things that have no function in society?

rocker's picture

Never Forget. Both are manipulated. The FED wants low Gold and Metal prices just as they want high Oil prices.

If they did not. They would stop QE. Remember, they think inlfation paid is good vs higher wages being paid.

They are geniuses. They have everything they want. Working Poor and Rich Banksters.

WarPony's picture

F/C's went off the chart when fuel went over $4.00/gal & the paycheck to paycheck crowd traded mortgage payments for commute fuel - at least until they lost their jobs.  This was around the time the Govt. back-dated the recession (two consecutive quarters of negative growth) from Dec. 2008 to Dec. 2007.

Looking at the chart of retail fuel, I don't remember the price below $2.00 - wazzup with that?

Hohum's picture

For now, omniscient investors don't seem to think the cost of a marginal barrel of oil is approaching $100.  The omniscient investors are wrong, but it is no surprise to find out the glorious traders are mistaken.  It's what they do.

pakled's picture

Sidebar: Going to cash is out of the question. Today Business Insider contributor Joe Weisenthal finally got around to reading the Kenneth Rogoff piece from last month suggesting the phasing out of paper currency. Weisenthal buys into the notion, and seconds the motion, refering to cash as a 'barberous relic'. Link here.

DirkDiggler11's picture

Business Insider ? Are you fuckiing kidding me ? They make MSNBC seem like a credible news outlet.

Business insider Is a couple of college journalism major dropouts that live in their parents basements and play video games all day while their "girlfriends" in Holland are busy "servicing" other clients ...

AccreditedEYE's picture

Just wait till the Fed starts hammering Oil futes... if VIX is any indication, there WILL BE PAIN. (for longs)

Dr. Engali's picture

All you need to know is what $4.00 a gallon gas did to the economy and $150 barrel oil did to the markets 2008. Oil is what will finally break everything.... again.

saltedGold's picture

I'll think we'll get a solid reminder soon.  Drove by the local gas station and regular was just raised to $4.05.  I'm seeing green shoots everywhere... growing out from under cars that haven't moved in months.

Emergency Ward's picture

Filled up for $4.15 in SoCal and looked too late across the street at $4.05.

GooseShtepping Moron's picture

You're right - oil will break everything. And then what will happen? Perhaps that will be the time Washington and Brussels decide that they want a piece of Vladimir Putin. China will ally with Russia militarily and, while Vlad is pounding Eastern Europe, Chia will rape Japan on the side. To really drive the nail into the coffin, Iran will seize the opportunity to detonate a nuke in the lower New York harbor, turning Manhattan into an island of spectacular but condemned ruins. It won't matter much after that. The signal that the world has had enough of the American experiment is already flashing loud and clear.

Cthonic's picture


By 2017, the world economy has collapsed.  Food, natural resources, and oil are in short supply.  A police state, divided into paramilitary zones, rules with an iron hand.

~ opening sequence of The Running Man '87


Flakmeister's picture

Arnie always did have a thing for the Latin 'tang or so it would seem...

CHX's picture

Energy-price induced cost push inflation will be / is a bitch for the world economy, and provides a solid floor to the PM-complex. 

SheepDog-One's picture

Damn snow and now it's the Muslims fault!

TheRideNeverEnds's picture

Irrelivant, its almost 30 minutes to close and tomorrow is tuesday, you know what that means....



aaaarrree  yyoooouu  rrreaaaddyyyy tooo  raaaaaaaaamp  iiiiitt!

roadhazard's picture

Gas will go up but on hype not demand.

El Hosel's picture

29 Trillions says its different this time.

Billy Sol Estes's picture

I am a muppet, I cannot lie.

I bought in at $1.86, rose to $2.45, was planning on selling soon. Guess I'll wait a lil while longer to see if Uncle Fed greases the wheel.

Bastiat's picture

Someone calculated that the $29 Trillion that is owned by central banks (according to the FT article) is about 1/2 the value of all the stocks on earth.  Since their ability to create money is apprently unlimited, and the cost of losing this created money is zero,  there is no other relevant consideration except what they do.  There really are no markets.