Crude Oil-S&P 500 Relationship Close to Danger Zone
Higher energy prices are keeping consumers from reviving the economy.
However, we're approaching a zone of concern, and that is the subject for today. While it may come as a surprise to many, the long-term correlation of weekly average returns between the cash S&P 500 and cash West Texas Intermediate crude oil at Cushing, Oklahoma, has been 0.019 since January 1983. The only times we've been outside of an in-sample 95% confidence interval of these rolling 13-week correlations to the upside over this period have been in September 1984, July 2006, August-September 2008, and March-April 2010. This last set of data points is highlighted in red.
The common factor here is global economic growth. Rising activity increases both energy demands and sets the stage for higher expected profits. Surprisingly, the connection between monetary largesse and rising crude oil prices is weak; this will be dealt with in a later article.
As the pundits say, it's not a regime market but a market of regimes. We can divide the history since January 1983 into four of them. The first, marked in blue, extended to the Federal Reserve's first declaration of war on deflation in May 2003. It was random. The second, marked in red went from May 2003 until the Bernanke Federal Reserve abandoned all semblance of monetary discipline in August 2007. It was linear; see the turquoise-framed regression synopsis.
The third regime, marked in green, extended to the July 2008 peak in crude oil prices. As noted in the magenta-framed regression synopsis, this was the only protracted period of negative correlation between the S&P 500 and crude oil. The fourth and current regime, extending from July 2008 to the present and marked in black with a yellow-framed regression synopsis, has been the most linear of all.
What, to return to the James Bond theme, is the clear and present danger? We are now entering the absolute price zone where negative correlation occurred. While that August 2007-July 2008 period also involved the credit crunch to knock stocks lower, we should remember the world didn't acclimate well to $4 per gallon gasoline.
The strongest sectors of late have been the consumer-related ones. Every dollar out of the consumer's pocket for higher energy costs is a dollar unavailable to support the great national pastime of spending money like there's no tomorrow. As noted above, higher crude oil prices affect consumer-related issues negatively.
While I don't expect crude oil prices to move significantly over $100 during the present phase, that is an opinion and not a brick wall. Once we head there, the world changes and not for the better for anything dependent on consumer spending.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.