Equity Markets Look to Gain from Oil’s Rise
Oil’s role in driving equity indexes
From July 6 to July 13, 2017, major US equity indexes such as the S&P 500 Index (SPY), the S&P 400 Mid-Cap Index (IVOO), and the Dow Jones Industrial Average (DIA) had negative correlations of 52.8%, 64.3%, and 43.3%, respectively, with US crude oil active fustures.
We discussed the returns of the Dow Jones and the S&P 500 in the previous part of this series. The S&P 400 Mid-Cap Index outperformed the other two indexes in the trailing week. During the same period, the index rose 1.7%, and US crude oil active futures rose 1.2%.
Interested in DIA? Don't miss the next report.
Receive e-mail alerts for new research on DIA
Energy stocks constitute 3.4% of the S&P 400 Mid-Cap Index. In the case of the S&P 500 Index and the Dow Jones Industrial Average, energy stocks are in the 6%–7% range.
In the seven calendar days through July 13, 2017, European equity indexes such as the FTSE 100 Index (EWU) and the CAC 40 Index (EWQ), had correlations of -7.9% and 24.2%, respectively, with US crude oil active futures. The magnitude of these correlations may not indicate a strong positive relationship between the two, as in the case of US equity indexes.
From July 6 to July 13, 2017, the FTSE 100 Index and the CAC 40 Index rose 1% and 1.6%, respectively. Energy stocks constitute more than 10% of these two equity indexes.
Why natural gas’s role could be limited
Natural gas currently has a limited role in influencing the natural gas–weighted stocks. So, its impact on the energy sector could also be limited. We will discuss this further in the next part of this series.
Equity indexes could be less sensitive to natural gas prices. In the long run, natural gas’s importance could be greater.
From July 6 to July 13, 2017, the Energy Select Sector SPDR ETF (XLE) rose 1.4%. The Technology Select Sector SPDR ETF (XLK) was the outperformer among the sector-based SPDR ETFs. It rose 3.6% in the seven calendar days through July 13, 2017.
However, the Consumer Staples Select Sector SPDR ETF (XLP) fell 0.5% and was the only loser among the SPDR ETFs during this period.