Wall Street’s reaction
Let’s look now at the US equity indexes between January 4 and January 11, 2018. The S&P Mid-Cap 400 Index (MID-INDEX), the Dow Jones Industrial Average (DJIA-INDEX), and the S&P 500 Index (SPX-INDEX) had negative correlations of 67.9%, 48.8%, and 46.7%, respectively, with US crude oil February futures. Despite negative correlations with oil prices, these equity indexes rose 1.7%, 2%, and 1.6%, respectively, in the trailing week compared to a 2.9% gain in US crude oil futures. We already saw in the previous part how supply fears have supported oil prices lately.
The S&P 500 Index, the Dow Jones Industrial Average, and the S&P Mid-Cap 400 Index invest ~6%, ~9%, and ~3%, respectively, of their allocations in energy stocks.
Similar trends were also observed in the European equity indexes. The FTSE 100 Index (EWU) (UKX-INDEX) and the CAC 40 Index (EWQ) (PX1-INDEX) had correlations of 19.5% and -15.7%, respectively, with Brent crude oil March futures in the seven calendar days to January 11, 2018. These two equity indexes rose 0.9% and 1.4%, respectively, compared to a 1.7% gain in Brent crude oil futures over that period. Energy stocks make up more than 10% of these two European equity indexes.
In the trailing week, natural gas futures had a correlation of 66.3% with US crude oil futures. So natural gas usually follows oil prices. However, in this short term, the direct effect of natural gas on these equity indexes could be less.
Between January 4 and January 11, 2018, the Energy Select Sector SPDR ETF (XLE) rose 2.2%. It was the fourth-largest gainer in our sector-based SPDR ETF list. So the rise in energy stocks could have contributed to the gains in these indexes. In the next part, we’ll look at the correlations of energy ETFs with oil prices.
Over this period, the Industrial Select Sector SPDR ETF (XLI) rose 3% and was the highest gainer among sector-based SPDR ETFs. The Real Estate Select Sector SPDR (XLRE) fell 2.4% and underperformed our list of SPDR ETFs.