How Stocks Respond To Oil Price Shocks

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: