Why Did the S&P 500 and Oil Diverge?

US equity indexes

In the trailing week, US equity indexes had the following correlations with US crude oil active futures:

  • the Dow Jones Industrial Average (DIA): 68.3%
  • the S&P Mid-Cap 400 (IVOO): 66.6%
  • the S&P 500 (SPY): 61.9%

These three equity indexes have exposure of ~5.1%, ~3.6%, and ~5.2% to the energy sector, respectively. The equity indexes returned 2.2%, 2.9%, and 20%, respectively, on May 30–June 6. US crude oil active futures fell 7.1% during this period.

Why Did the S&P 500 and Oil Diverge?

Oil and equity indexes

The correlations indicate a positive relationship between oil and these US equity indexes. However, individual factors dominated oil and these equity indexes’ returns. The rise in US crude oil inventory levels dragged oil prices. Hope for progress in the trade war talks supports equity indexes like the S&P 500 (SPY).

Energy sector relative to the broader market

In the trailing week, the Energy Select Sector SPDR ETF (XLE) rose 2%. XLE had the second-lowest rise among the SPDR ETFs that divide the broad market into subsectors. The recovery in the broader market might have contributed to XLE’s upside. The Communication Services Select Sector SPDR ETF (XLC) fell 2.1% and underperformed the SPDR ETFs. The Materials Select Sector SPDR ETF (XLB) had the largest rise of 6.9%. Most of the SPDR ETFs ended in the green.