Crude’s impact on the S&P this year

"We aren’t addicted to Oil but our cars are."

-James Woolsey

There’s been a lot of discussion about the trajectory of the drop in Crude Oil prices from a high of $106 in June to the low of $44 reached last week. Is it good or bad for the economy and for the broad U.S. stock market?

Heading into Q4, on the heels of 5% growth in GDP in Q3, we felt good about the drop. Gas prices continued to come down and the feeling was that we would see increased vigor by the consumer heading into the holiday season. But, the drop in Crude Oil actually accelerated, and coming into this year the dialogue has morphed more into that of concern. Concern over deflation and recession on a global scale, concern over unemployment rising with Energy sector layoffs and, on the extreme end, concern on the possibility of another global economic collapse.

January has been volatile, like last year. The VIX started the year at 18, has been as high as 23 and was up almost 12% on Friday. The impact of consumer spending on Q4 results, which makes up 68% of GDP, is still to be determined but results have been mixed thus far. Energy stocks for sure have been taking a beating, which has been the biggest drag on the S&P 500.

Do we have any historical precedence for this? Specifically, are there any environments historically similar to that of today where Crude AND the S&P have traded in a similar fashion as they have for the past year? The answer is yes. EidoSearch ran this study in 2 seconds, using the last one year of the S&P 500 (SPX) and Crude (CL) and found 6 similar instances. When we say similar, we are using statistics to find the instances historically with the most similar pattern which is a critical part of finding meaningful comps. Here’s a table of the 6 historical comps:

Historic instances of Price trend in Crude (CL) with S&P500 (SPX)

The S&P 500 is up in the next 1 year in all 6 similar environments historically, and the average return is 18.6%. Crude is up in 5 of the 6 instances, excluding 1997.

History of Crude (CL) and S&P500 (SPX) : Statistics EidoSearch

Have a great week!