Do Crude Oil Prices Impact the S&P 500 Index?



Crude oil and the S&P 500 Index

For the week ending October 28, 2016, December US crude oil (UWTI) (USO) (OIIL) (USL) (SCO) (DWTI) futures fell 4.2%. The S&P 500 index (SPY) (QQQ) (IVV) fell 0.7% during the week.

Among the SPDR ETFs, the Energy Select Sector SPDR ETF (XLE) witnessed the third-highest fall. XLE fell 1.2% between October 21 and October 28. The fall in XLE coincides with the large fall in oil prices.

The Utilities Select Sector SPDR ETF (XLU) rose 1.0% between October 21 and October 28, 2016. On October 28, 2016, XLU rose 0.3% because of a sell-off in the broader market. Utility stocks, due to their steady business models and dividend yields, tend to become attractive during economic uncertainties.

On October 28, 2016, the FBI (Federal Bureau of Investigation) revealed an investigation into Democratic presidential candidate Hillary Clinton’s use of a private email server. It increased uncertainty around the upcoming US presidential election.

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What’s the quantitative relationship?

In the past five trading sessions, crude oil and the S&P 500 index moved in the same direction in three instances. Their correlation in the last five trading sessions stood at 6.3%. The correlation is positive, but too low to indicate any direct relationship between crude oil and the S&P 500 index during this short timeframe.

Crude oil’s price can be a leading indicator for equity markets (SPY) (QQQ) (IVV). A stronger economy means more demand for oil. Also, the energy sector accounts for ~7.3% of the S&P 500 index. So, movements in energy prices can also directly sway the broad market index.

In the final part of our series, we’ll look at the implied volatilities of crude oil and natural gas.


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