Oil Diverges From U.S. Stocks by the Most Since 2011Nick Taborek and Alex Barinka
Oil and American equities are moving in opposite directions by the most in almost two years amid prospects of military intervention in Syria.
The Standard & Poor’s 500 Index slid 1.6 percent to 1,630.48 yesterday while West Texas Intermediate surged 2.9 percent to $109.01 a barrel on the New York Mercantile Exchange. The 4.5 percentage-point divergence was the widest since November 2011, data compiled by Bloomberg show. Crude extended gains today, surging to a two-year high.
The commodity’s advance amid the biggest retreat in U.S. shares since June shows attention is shifting to armed conflict and away from the world economy. Oil and the S&P 500 have been positively correlated since April 2011 as the global financial crisis receded. The link is breaking down on concern a U.S. attack may escalate and disrupt supplies from the region that holds almost half of all proven oil reserves.
“If there was an outbreak of hostilities and the insurrection in Syria were to escalate, there are a number of fairly unstable scenarios that could unfold,” Randy Bateman, who oversees $15 billion as chief investment officer of Huntington Asset Advisors in Columbus, Ohio, said by telephone. “Everybody’s waiting to see what’s going to happen.”
Oil and stocks have tended to move in the same direction for more than two years, with the 30-day correlation coefficient reaching this year’s peak of 0.66 on April 17, data compiled by Bloomberg show. The measure slumped to 0.05 yesterday, the least since April 5, 2011. A reading of 1 implies the assets move in lockstep, while 0 shows no relationship.
The last time daily swings in crude and the benchmark U.S. equities gauge diverged by more than yesterday was on Nov. 16, 2011, after Fitch Ratings warned of contagion from Europe’s sovereign-debt crisis and crude prices rose on speculation a reversal of flows on a U.S. pipeline would ease a Midwest glut.
The S&P 500 gained 14 percent this year and oil jumped 22 percent amid signs the world’s biggest economy is strengthening. Stocks retreated more than 2 percent after U.S. Secretary of State John Kerry said Aug. 26 that President Barack Obama would hold Syria accountable for using chemical weapons. In isolation, threats of past wars have spurred uneven returns in the equity market.
Asian shares slumped today, with the MSCI Asia Pacific Index heading for its lowest close since June 27. Oil touched $112.24 a barrel, the highest price since May 2011.
Crude has disconnected from stocks amid concern that any strike against Syria may spread to other parts of the Middle East and threaten exports from a region that produces 35 percent of the world’s oil. Saudi Arabia, the largest supplier in the Organization of Petroleum Exporting Countries, has backed rebels opposed to Syrian President Bashar al-Assad. Assad’s allies include Iran, the group’s sixth-biggest producer.
“The concern is that an attack on Syria will reverberate through the region, increasing the spillover into other countries and possibly resulting in a larger supply disruption elsewhere,” Michael Wittner, Societe Generale SA’s New York-based head of oil market research, said in an e-mailed report. London-traded Brent crude, which surged 2.5 percent to more than $117 a barrel on the ICE Futures Europe exchange today, may “spike briefly” to as high as $150 a barrel if that happens, he said.
Obama and his aides are consulting with U.S. lawmakers and allies about a military response. Syria’s use of chemical arms must be punished, French President Francois Hollande said yesterday. U.K. Prime Minister David Cameron summoned parliament back from its recess on Aug. 29 to discuss possible action.
Any response by the U.S. would have a narrow scope and not be aimed at taking out Assad, said a U.S. official, who spoke on the condition of anonymity. A strike would concentrate on Syria’s weapons capabilities.
“We hope that diplomacy plays a role with a cool head and we don’t see the U.S. embroiled in another military action,” Sean Fenton, a Sydney-based fund manager, who helps oversee about $1 billion at Tribeca Investment Partners, said in an interview. “That could derail the current economic momentum.”
Past conflicts provide few clues for investors. The S&P 500 slipped 2.2 percent in the three days after Colin Powell made the case for war with Iraq in a speech at the U.N. on Feb. 5, 2003. Oil rose 4.6 percent in the period.
The index fell another 1.1 percent in the three days after war began on March 20, 2003, before recovering, pushing the S&P 500 up 10 percent by May 30. Oil declined 4.1 percent in the three days following the invasion and pared that loss to 1.1 percent by the end of May.
Stock investors cheered the U.S. decision to enter the First Gulf War, with the S&P 500 gaining 4.2 percent in the seven trading days that spanned Congress’s authorization of military force and the first bombings on Jan. 17, 1991. Oil slumped 11 percent after a 56 percent increase in the prior six months.
Comparisons to earlier wars illustrate stocks often recover from losses sparked by conflict.
During World War II, the Dow Jones Industrial Average declined an average of 10 percent a year from 1939 through 1942, then advanced an average of 15 percent annually through 1945, when it rallied 27 percent -- a gain that would be the biggest until it rose 44 percent in 1954, according to data compiled by Bloomberg.
In the week following the failed Bay of Pigs invasion of Cuba, launched on April 17, 1961, with the intention of overthrowing Fidel Castro, the benchmark measure lost 3.4 percent. The index recouped its losses by May 15 and climbed 7.3 percent by year’s end.
During the Vietnam War, the S&P 500 fell 4.1 percent in the two weeks after the start of the Tet Offensive, the wave of attacks by the North Vietnamese that began Jan. 30, 1968. Stocks recovered and advanced 12 percent by the end of the year.
Tim Hoyle, director of research at Radnor, Pennsylvania-based Haverford Investments, which oversees about $6 billion of assets, said the prospect of a military strike in Syria “is not affecting the way that we are investing our portfolios today.”
“In the short-term, any type of uncertainty and conflict in the Middle East has negative implications, especially on the oil markets and secondarily the equity markets,” he said in a phone interview. “Historically, the markets have reacted more positively to the initiation of hostilities as to the buildup of hostilities.”