Study: long term correlation between oil and the stock market


Standard economic thinking would have you believe that rising oil is bearish for the stock market because:

  1. Rising oil prices = rising energy costs.
  2. Rising costs hurt companies’ profits. Consumers also have less money to spend on discretionary spending, which hurts the economy and corporations.
  3. This hurts the stock market.

This isn’t true. Rising oil prices are not consistently bearish for the stock market. The long term correlation between oil and stocks is very random.
*Some investors and traders are concerned about this right now because oil prices are rising right now. They think it will hurt the stock market.
Here’s oil and the S&P 500 from 2016-2017. Notice how the 2 markets moved higher together.

Here’s oil and the S&P from 2009-2011. Notice how the 2 bull markets happened at the same time.

Here’s oil and the stock market from 2001 to 2008. Notice how the long term correlation is very random – it flips back and forth between positive and inverse.

  1. Sometimes the stock market goes down then oil goes up.
  2. Sometimes the stock market goes up when oil goes up.


Notice how oil and stocks went up together in 1999 to early-2000.

But rising oil prices are not consistently bullish for the stock market either. This was clearly the case in the 1970s. Oil and stocks were inverse.
Oil jumped from 1973-1974, thanks to the OPEC embargo. The stock market tanked from 1973-1974 (it was a bear market). The stock market went up and then down in 1979 to early-1980. It was flat overall.

So how do rising oil prices impact the stock market?

Rising oil prices have an impact on the economy.

  1. Rising oil prices only have a bearish impact on the stock market if oil prices SOAR in a very short amount of time. This usually happens during times of political crisis or war.
  2. Rising oil prices have an inconsistent impact on the stock market and economy if oil prices are rising slowly and steadily.

As oil prices rise higher, you don’t really know when it will have an impact on the economy. Instead of predicting the exact price at which the economy will take a hit, just look at when the economy is actually impacted. Don’t try to predict numbers in advance.
Remember, the economy and stock market move in the same direction in the long term. Focus on the leading economic indicators and ignore correlations that are inconsistent.
This chart looks at the inflation-adjusted price of oil. There is no consistent level at which oil will start to hurt the economy or stock market.

$120 is not a “magical number” that causes economic deterioration and significant corrections or bear markets. The inflation-adjusted price of il remained just under $120 from 2012-2014. The stock market rallied nevertheless.
Oil is only bearish for the stock market if there’s stagflation (rising inflation/oil + economic deterioration). And since deflation (deteriorating economy) is bearish for the stock market as well, you might as well just focus on the economy.

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