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The Changing Correlation Between The S&P 500 & Oil

Tyler Durden's picture




 

Via The World Complex blog,

Today we investigate the relationship between oil and the broad US market, using the S&P 500 index as a proxy.

A common thought is that the two functions are inversely correlated, with the US market in danger whenever oil rises too high.

The relationship has been a complex one over the past 11 years, but the correlation is positive most of the time.

In particular, we see from 2003 until late 2007, both oil and the market rose in tandem. The only time the two records show an inverse correlation was during the windup to the financial crisis--from late 2007 to July 2008.

The collapse in both market index and oil price through the second half of 2008 shows up quite clearly. The two prices rise in tandem from early 2009 to the end of 2012.

It doesn't seem logical that the S&P should be positively correlated to oil prices--so it is more likely that both records are correlated to the same thing--inflation. But what to make of the last 18 months, in which we see an almost vertical rise in the stock market without an increase in the oil price? Is an American renaissance in the works, powered by increased American oil production? Or is it due to the much rumoured mass purchase of securities by financial institutions, powered by monetary creation?

Is it being done to prevent another period of negative correlation, which might foretell another economic crisis?

Stay tuned . . .

 

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Thu, 07/03/2014 - 18:22 | 4923047 autofixer
autofixer's picture

That chart looks like someone gave a 2 year old a crayon and blank piece of paper. 

Thu, 07/03/2014 - 18:40 | 4923096 Cpl Hicks
Cpl Hicks's picture

Looks like a 3-D representation of a fracked oil well.

Thu, 07/03/2014 - 18:50 | 4923119 LetThemEatRand
LetThemEatRand's picture

It's also a graphical representation of Krugman trying to draw a straight line between money printing, and middle class benefit from said money printing.  "You see, we start here, and then money is printed, and then..."

Fri, 07/04/2014 - 22:04 | 4925927 mickeyman
mickeyman's picture

Well, it was designed by the Fed.

Thu, 07/03/2014 - 18:29 | 4923075 TheRideNeverEnds
TheRideNeverEnds's picture

I too have noticed the strong correlation between the S&P and oil.  

 

Oil goes down S&P goes up, oil goes up S&P goes up, oil goes sideways S&P goes up, I think we are onto something here.... 

Thu, 07/03/2014 - 18:42 | 4923102 NoDebt
NoDebt's picture

I think you nailed it.

Thu, 07/03/2014 - 18:32 | 4923080 The Alarmist
The Alarmist's picture

Probably more correct to say they are both correlated to money supply.

Fri, 07/04/2014 - 08:08 | 4924303 lucyvp
lucyvp's picture

yes, as long as the denominator is dollars, and dollars are being printed, then everything goes up in price.

I'm certainly glad there is no inflation :)

Thu, 07/03/2014 - 18:36 | 4923082 kurzdump
kurzdump's picture

The correlation should be positive, cus the USD is an 'oil-currency', so if oil prices rise, stocks valuated in USD should rise too.

The gradiant of the trend lines seems to indicate manipulation, policy change, faith in the USD. Doesnt look like very promising recently.

Thu, 07/03/2014 - 19:06 | 4923160 Bemused Observer
Bemused Observer's picture

"Is it being done to prevent another period of negative correlation, which might foretell another economic crisis?"

Yes. Yes it is. And that's a perfect example of the problem with the thinking here. Note how you phrased it, "might foretell another economic crisis"...that's it, foretell. They don't want ANY data that indicates a bad end to the current path they're on. They want to prevent the negative correlation because it is a harbinger of trouble. And their solution? Well, if we shut the harbinger up, we don't have to worry about it sounding-off and interrupting what we're doing. I suppose, but wouldn't it be smarter to fix the economy than it is to quiet all the negative indicators of trouble-brewing?

Sure, that works, in a strange and twisted way...I guess it depends on what you're trying to accomplish. But it's kinda like dis-connecting your fire alarm so it doesn't go off at night while you're trying to sleep, no?

Thu, 07/03/2014 - 19:12 | 4923172 Hohum
Hohum's picture

Oil is flat because if it goes up, the economy dies.  Customers can only borrow so much.  Stocks are for the "wealth creators" who don't know how to create wealth.  But then again, who does (on a net energy basis)?  We're all takers.  We are good at destroying wealth.

Fri, 07/04/2014 - 08:14 | 4924311 lucyvp
lucyvp's picture

I think oil is flat because the middle class is fearful and has been goaded into buying small cars and driving less.  Fracking is increasing american oil output.  But soon ... any U.S. decrease in demand will be overwhelmed with new emerging market demand, and the fracking boom will die, just like the u.s. post war oil boom died too. The fracking boom will die much sooner.  Then get ready for oil to double every decade.  May you live in interesting times :)

Thu, 07/03/2014 - 22:42 | 4923484 MeelionDollerBogus
MeelionDollerBogus's picture

meh. I can read this but I could certainly do a better display.

For example: http://flic.kr/p/ochVHw

Fri, 07/04/2014 - 06:25 | 4924208 _ConanTheLibert...
_ConanTheLibertarian_'s picture

"But what to make of the last 18 months, in which we see an almost vertical rise in the stock market without an increase in the oil price?"

It proves the stock market is rigged. Duh!

Fri, 07/04/2014 - 10:51 | 4924529 globalvagabond
globalvagabond's picture

Texas' oil production is about to eclipse Iraq's.  And we haven't even drilled Florida or either coast of the US in earnest. 

That does not include new produciton from North Dakota, California, Alaska, Oklahoma, New Mexico, Louisiana, Colorado, Wyoming, Kansas, Utah, Mississippi, etc.

Whose easy oil ran out over the last 40 years while ours stayed in the ground?  Not ours as we were busy winning a cold war by getting Saudi to pump more and not Russia's as they were busy imploding due to the low oil price.  Going from a net importer to a net exporter of the most globalized energy source is going to wreak havoc on correlations.  Get real.

Fri, 07/04/2014 - 11:25 | 4924603 damicol
damicol's picture

As the S&P is supposed to be an index or proxy for what the US econmy is in terms of size  and future prospects, WTF has it got to do with inflation.

As the index is at all time highs and the  the US econmy is neither anywhere near its all time highs and its future prospects are  totally fucked courtesy of the Kenyan clusterfuck money and the fucking corrupt thieving shit at the Fed  all you need to wonder is why the the fuck is anyone buying the shit at such pinnacles.

 

Fri, 07/04/2014 - 16:31 | 4925344 Chartsky
Chartsky's picture

Because the banksters get FREE $$$ from the Fed -- almost every day -- and they can either put it in nice big piles on their mahogany conference room table next to the imported marble one, or they can buy free stock in corporations they want to "acquire" or otherwise control.  Besides, they'll get out at or near the top while the stupid retail traders are still buying the hype about "new, record all-time highs" and what a great eceonomy this is!

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