Is Oil Causing Trouble for Wall Street?


Nov. 20 2020, Updated 2:33 p.m. ET

Equity indexes and oil

Between November 9 and November 16, 2017, the S&P 500 Index (SPY) had a correlation of 42.5% with US crude oil (OIIL) active futures. Over this time period, the S&P 500 Index (SPY) was flat, while US crude oil active futures fell 3.6%.

US crude oil prices would likely have limited the upside of the S&P 500 Index because ~6% of the index consists of energy stocks directly impacted by energy prices.

Similarly, the Dow Jones Moving Average (DIA) was flat in the trailing week and had a correlation of 32.9% with US crude oil prices. Energy stocks constitute ~9% of the Dow Jones Industrial Average Index. Of course, related sectors like financials are also indirectly impacted by energy prices.

However, in the past five trading sessions, the S&P 400 Mid-Cap Index (IVOO) rose 0.6%. IVOO had a correlation of 39.1% with US crude oil active futures during this time period, and energy stocks constitute 3%–4% of the S&P 400 Mid-Cap Index.

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European indexes

In the seven calendar days to November 16, 2017, the FTSE 100 Index (EWU) and the CAC 40 Index (EWQ) had correlations of -55.5% and -1.4%, respectively, with Brent crude oil active futures. Brent crude oil active futures fell 4% during this period.

Both of these equity indexes fell 1.3% during the same period, and energy stocks make up more than 10% of both indexes.

Natural gas impact

Some natural gas-weighted stocks’ returns are more aligned with oil than with natural gas prices. In fact, natural gas is itself often correlated with crude oil prices, and so equity indexes aren’t typically as sensitive to changes in natural gas prices as they are to changes in crude oil prices.

Individual sectors

In the trailing week, the fall in oil prices likely hit energy stocks directly. The Energy Select Sector SPDR ETF (XLE)—the largest among our list of sector-based SPDR ETFs—fell 4.2% during the week, while the SPDR S&P Telecom ETF (XTL) rose 3%.

In the next part, we’ll discuss XLE’s correlation with oil.


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