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Why Energy Is Crucial to Wall Street’s Returns

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Jan. 30 2017, Published 12:53 p.m. ET

Crude oil, natural gas, and the S&P 500 Index

In the week ended January 27, 2017, US crude oil (USO) (OIIL) (USL) (SCO) March futures fell 0.10%, and natural gas March futures rose 4.6%. The S&P 500 Index (SPY) (QQQ) (IVV) rose 1.0% in the same week. The Energy Select Sector SPDR ETF (XLE) witnessed the second-largest fall among the sector SPDR ETFs, falling 0.40% from January 20–27, 2017, on the back of small losses in crude oil prices. Historically, XLE has been more correlated to crude oil than to natural gas.

Among SPDR ETFs, the Materials Select Sector SPDR ETF (XLB) rose the most, rising ~3.4% from January 20–27, 2017.

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What’s the relationship?

In the past five trading sessions, crude oil and the S&P 500 Index moved in the same direction in one instance. Natural gas and the S&P 500 Index moved in the same direction in two instances.

The correlation in the last five trading sessions between crude oil and the S&P 500 was 3.5%. The correlation between natural gas and the S&P 500 was about 30.1%. But the correlation between natural gas and the S&P 500 over this short period isn’t useful because natural gas-weighted stocks in the energy sector are less aligned to natural gas’s price movements.

Sentiment in the broader financial and commodity markets globally can affect securities and commodities across markets. On the other hand, weakness in the crude oil market in the past has seen equity markets fall in fear.

Notably, the energy sector accounts for ~7.3% of the S&P 500 Index. So movements in energy prices can also directly sway the broader market index.

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