Does the S&P Need Higher Oil?

Crude Oil is crashing again, down 36% from its high in early October.

Crude oil graph1

With the S&P 500 moving lower in tandem during October (11% correction), part of the blame was placed on lower Oil prices.

S&P 500 index decline graph2

If only Oil prices had not collapsed, some pundits argued, stocks would be hitting new highs. How accurate is this line of thinking? Do US stocks really need higher Oil prices to perform well?

Let’s take a look back at history…

We have data on Crude Oil (spot prices) going back to March 1983. The monthly correlation to the S&P 500 since then? Essentially zero (0.06).

There are times where Oil and equities are positively correlated and other times when they are negatively correlated.

Crude oil and the S&P 500 index rolling correlation graph3

Data Source for all charts/tables herein: Bloomberg,

During the financial crisis of 2008 and its aftermath, the correlation between equities and Crude became more consistently positive and higher than in prior cycles.

Why? A deflationary, depression-like collapse was the major fear in 2008, and lower Crude prices that year were said to be a harbinger of bad things to come. When that theory did not materialize in 2009, the opposite was said to be true. The rally in Crude was thought to be a positive, indicating reflation and stronger global growth.

But this period of reliably positive correlation was an outlier, as evidenced by the unpredictable relationship Crude and the S&P 500 has had over the longer-run:

  • From 1984-87, Crude declined every year while the S&P advanced.
  • The S&P continued to advance in 1988 and 1989 while Crude rebounded.
  • Then, in 1990, the S&P experienced its only down year in the 1982-99 period while Crude Oil was up 30%.
  • From 1994-96 the S&P and Crude moved up together.
  • From 1997-98, Crude declined while the S&P experienced two strong years.
  • The 2000-02 Bear Market in stocks displayed no obvious correlation to Crude.
  • From 2003-07, Crude and the S&P rose together during the commodities boom.
  • In the 2008 deflationary collapse, they declined together and during the 2009-11 reflation they rose together.
  • In 2014-15, as Crude has suffered one of its worst declines in history, the S&P still finished higher.
  • Then, in 2016-17 when Crude Oil rebounded, the S&P 500 continued to march higher.
  • This year, Crude Oil is down 15% while the S&P is still up over 4%.

Crude oil and S&P500 from 1984 to 2018 chart4

So do U.S. stocks really need higher Oil prices to generate a positive return? The answer based on the historical evidence is a definitive no. In the last 7 years, Crude Oil has declined 47% while the S&P 500 is up over 163%. This is just one example among many where stocks have posted gains in spite of lower Oil prices.

S&P500 index of crude oil graph5

How is that possible? Because it is not clear exactly what a higher or low Crude price means for the overall economy and an S&P 500 Index where the Energy sector which now comprises less than 6%.

Most studies show that the U.S. economy (and U.S. consumer), as a net consumer of commodities, ultimately benefits from lower Oil and Gas prices. Similarly, companies outside of the Energy spectrum benefit from lower input costs.

Ultimately, the correlation between Crude and stocks depends on why Crude is moving higher and lower, which is difficult to ascertain in the moment. It only becomes clear in hindsight. Certainly a crash in Crude as we saw in 2008 which was an indication of a collapse in global demand was not going to be a positive for the U.S. equity market. However, a crash in Crude due to increasing supply and alternative forms of Energy could very well be construed as positive for markets.

What is the reason why Crude Oil is crashing today? Again, we’ll only know in hindsight.

Ironically, while the fear of the day is over lower Crude Oil prices, historically the opposite situation has been more harmful for markets and the economy. If we look back at history, 1-year spikes in Crude above 90% occurred in 1987, 1990, 2000, and 2008. All of these spikes were associated with equity Bear Markets and the 1990, 2000, and 2008 spikes associated with U.S. recessions. So perhaps the greater fear should be not a continued slide in Crude, but a spike higher.

Crude oil rolling 1-year return graph6

That is not to say that some stability or a bounce in Crude in 2019 would not be welcomed by U.S. stocks. It certainly could be if the rise was attributed to an increase in global demand. But predicting whether and why Crude rises and falls is not an easy game to play. Harder still is predicting its impact on stocks.

As Howard Marks once said: “There’s nothing intelligent to be said about the future of the price of oil.”




Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Charlie is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He has been named by Business Insider and MarketWatch as one of the top people to follow on Twitter and his work has been featured in Barron’s, Bloomberg, and the Wall Street Journal.

You can follow Charlie on twitter here.


Pension Partners, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information about Pension Partners please visit: and search for our firm name.

The information herein was obtained from various sources. Pension Partners does not guarantee the accuracy or completeness of such information provided by third parties. The information given is as of the date indicated and believed to be reliable. Pension Partners assumes no obligation to update this information, or to advise on further developments relating to it.

The S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. An index is an unmanaged portfolio of specific securities which is often used as a benchmark in judging relative performance of certain asset classes. An index does not charge management fees or brokerage expenses and no such fees or expenses were deducted from the performance shown.

Past performance is not indicative nor a guarantee of future results.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Comments are closed.