Correlation Between Oil And Stocks Highest Since 1980

Submitted by Eric Bush via Gavekal Capital blog,

Stock prices and oil prices have been moving in a more positive correlated fashion recently than at any point since 1980. The 65-day correlation between Brent Crude Oil and MSCI World Index peaked at 52% on 11/13/2015 and has since fallen back a bit to 41%. The 200-day moving average is also at 41% and continues to climb higher. The current correlation of 41% is the highest correlation between stocks and oil prices ever over the history we have for both series.

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Of course there have been certain sectors of the stock market that have been highly correlated to the price of oil for quite a while. And fortunately for investors, there have been sectors that have had a negative correlation. In the first chart below, we show GKCI Developed Market cyclical sectors (Consumer Discretionary, Energy, Financials, Industrials, Information Technology, Materials) relative to the overall stock market (blue line). The red line shows the 5-day moving average for Brent Crude Oil. Over the past five years, these two series have had a 85% correlation. As oil has fallen, cyclical stocks have fallen with it.

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In the second chart, we show GKCI Developed Market growth counter-cyclical sectors (Consumer Staples and Health Care) relative to the overall stock market (blue line). Once again, the red line shows the 5-day moving average for Brent Crude Oil.

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This time we have inverted the right-hand scale so as to better illustrate the relationship. Here, we see growth-counter cyclicals have actually had a NEGATIVE relationship with oil prices. To the tune of a -84% correlation over the past five years. Consequently, growth counter-cyclical stocks have been the best way for investors to buck the drag that oil prices have had on stock prices.