Cacophony in Oil May Be Noise to Finally Wake Up Stocks
While the U.S. stock market has been so quiet lately it looks like it’s fallen asleep, the oil market has been making noise that threatens to interrupt the slumber.
The Standard & Poor’s 500 Index has gone 40 full trading sessions without rising or falling 1 percent or more, the longest streak of quiet since 1995. Meanwhile, front-month West Texas Intermediate crude has had nine daily moves of at least 1 percent over the same period, including gains of 2 percent and 1.7 percent last week. WTI is fluctuating near $107 a barrel, the highest since September, and Brent crude has risen to about $113.
The VIX gauge of expected stock-market volatility flirted with a record low about a week ago. The VIX’s equivalent for crude, based on options for the U.S. Oil Fund ETF, surged 34 percent last week for its biggest gain in two years as oil jumped more than 4 percent amid concern sectarian violence in Iraq will hurt supplies.
Based on the recent past, stocks may have gotten off easy with only a 0.7 percent retreat in the S&P 500 last week amid that much volatility in oil markets. The S&P 500 slid 3 percent in the week of the last jump in the oil VIX of this magnitude, a 38 percent surge in 2012. The benchmark stocks gauge lost 6.4 percent when the oil VIX surged 41 percent in the first week of May 2010.
While not necessarily the cause of the past economic slumps, surges in oil prices preceded recessions since the 1970s, as Ed Yardeni, president of Yardeni Research Inc., wrote today.
“Last week’s fast-paced developments in Iraq have the potential to turn into a serious threat for the bull market” in stocks, Yardeni wrote. “At least, they give investors something new to worry about.”
Prices of oil and stocks tend to be positively correlated, meaning they move in the same direction more often than not. At least until they aren’t. The relationship tends to weaken when crude gets to headline-worthy levels.
At about 0.18, the correlation coefficient between crude and the S&P 500 over the past 120 days is near the lowest level since mid-2011, when crude topped $110 for the first time in almost three years. The correlation actually went negative when crude was rallying toward its record above $145 a barrel six years ago.
In the final year of recent bull markets in stocks, the gains in oil dwarfed the advances in equities.
Oil was up 34 percent versus the S&P 500’s 16 percent gain in the year through Oct. 9, 2007, the date of the equity market’s peak before the financial crisis. In the year before the top of the dot-com bubble, crude had surged 83 percent compared with the 20 percent gain in the S&P 500.
Right now, there is no rhyme in the charts to those previous peaks: oil is up about only about half as much as the S&P 500’s 18 percent surge over the past year.
Still, it’s hard to imagine U.S. equities continuing their nap if the oil market keeps making this much noise.
To contact the editors responsible for this story: Lynn Thomasson at firstname.lastname@example.org Jeremy Herron