Correlation of equity indexes with oil

Based on their correlations with crude oil, 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) weren’t very impacted by oil’s movement between June 29 and July 6, 2017.

Is the Broad Equity Market Concerned about Oil Prices?

Below are the correlations of these equity indexes with oil in the week ended July 6, 2017:

  • The S&P 500 Index (SPY): -7.1%
  • The S&P 400 Mid-Cap Index (IVOO): 33%
  • The Dow Jones Industrial Average (DIA): 26.8%

The same trend is evident with major European equity indexes as well. The correlations of the FTSE 100 Index (EWU) and the CAC 40 Index with US crude oil active futures were -3% and 8.6%, respectively, between June 29 and July 6, 2017.

In fact, the CAC 40 Index was flat, while the FTSE 100 Index fell 0.2% in the week ended July 6, 2017. Among US equity indexes, only the Dow Jones Industrial Average was in the green, while the S&P 500 Index (SPY) and the S&P 400 Mid-Cap Index (IVOO) were in the red during this period. We’ve discussed their returns in part one of this series. US crude oil August futures rose 1.3% in the week ended July 6, 2017.

European equity indexes have exposure of greater than 10% to energy stocks, while exposure of the US equity indexes discussed above to the energy sector varies between 3% and 7%.

Sector-based SPDR ETFs

The Industrial Select Sector SPDR ETF (XLI) rose 0.9% between June 29 and July 6, 2017, and was the largest gainer among the sector-based SPDR ETFs. The Energy Select Sector SPDR ETF (XLE) fell 0.8% and was the fourth-smallest loser among our list of SPDR ETFs during this period. Chevron (CVX) and ExxonMobil (XOM) fell 0.3% and 0.7%, in the week ended July 6, 2017, respectively. Both these stocks constitute ~38.3% of XLE, helping the ETF ignore oil’s gain.

However, at times, sharp moves in oil can drive these equity indexes, while at others, the sentiment in broad equity markets can sway the crude oil market.

We’ll explore this link a bit more in the following part.

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