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Why the S&P 500 Index and Crude Oil Prices Are Moving in Sync

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Three-month correlation up compared to 10-year correlation

In the last three months, the S&P 500 Index (SPY) (IVV)(QQQ) has correlated approximately 56% with WTI (West Texas Intermediate) crude oil prices. However, in the last ten years, the S&P 500 Index has correlated only 32% with WTI crude oil prices (OIL) (USO).

Why the S&P 500 Index and Crude Oil Prices Are Moving in Sync

On a YTD basis, the S&P 500 Index has moved in tandem with WTI crude oil prices. On February 11, both WTI crude oil and the S&P 500 Index hit 2016 lows. Since February 11, the S&P 500 Index has risen 10%, while crude oil prices have rallied more than 50%. The above graph shows the correlation of the S&P 500 Index with crude oil prices over various timeframes.

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Why has the correlation increased?

The fall of crude oil prices below $30 sent bearish ripples throughout global financial markets. The ripples were not limited to the energy sector. The plunge in crude oil prices has led to the bankruptcies of many E&P (exploration and production) companies. In 2015, 67 oil and gas companies filed for bankruptcy compared to 14 in 2014, according to consulting firm Gavin/Solmonese.

WTI crude prices falling to 2003 levels could have far-reaching implications because energy companies are major contributors to the global economy. Plus, banks around the world have exposure to these companies via loans and credit lines. Large institutions like retirement fund companies also have exposure to energy companies. E&P companies such as ConocoPhillips (COP), ExxonMobil (XOM), and Murphy Oil (MUR) have already slashed their capital expenditure budgets for 2016, which will have an impact on the broader Market this year.

In the next part of this series, we’ll look at various sectors within the S&P 500 Index.

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