What Do Crazy High Oil Prices Mean for the S&P 500?

Using volatile oil prices to predict the market's next move

Senior Quantitative Analyst
Apr 20, 2022 at 8:26 AM
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Oil prices have spiked over the past few months, fueled by the Russia-Ukraine war, and sit just above $100 per barrel. You can see in the chart, oil recently hit its highest level in over ten years. This week, I’m looking at how stocks have performed given elevated prices of oil and after similar spikes.

Oil over 100

Oil Over $100

The first time oil crossed into triple-digits was 2008. The tables below show the return of the S&P 500 Index (SPX) over the next three months and one year, based on the price of oil. High oil prices have been nothing short of a disaster. The S&P 500 averaged a loss of 3.4% over the next three months, with less than half of the returns positive. Over the next year, the index averaged a loss of 2.1%, with 66% of the returns positive. Otherwise, the index averaged double-digit gains, with 75% of the returns positive. Cheap oil has led to the most bullish returns. When oil has been below $50 per barrel, the SPX gained over 20% on average, with 94% of the returns positive.

3 Month Returns Since 2018

The results above are skewed by the 2008-2009 crash. Oil was over $100 just before that crash. If I change the time frame and only show returns after 2010, I get the data below. In the first table, which shows returns over the next three months, there’s still underperformance when oil was over $100. The returns aren’t negative at least. The one-year returns show a respectable average return of 11.4%, with an impressive 97% of returns positive. 

Since 2010

Oil Spikes 50% in Four Months

Above, I looked at S&P 500 returns based on the oil price level. Next, I’m looking at oil price spikes. Specifically, I’m looking at how the broad-market index performed after oil spikes by 50% over a four-month period (I’m only considering one signal every six months). There have been 10 spikes like this since 1989. The first table below shows returns after these spikes (the recent spike was over a month ago so there’s one more return in that time frame). For comparison, the second table shows typical stock returns since then. Oil spikes don’t seem to have much effect on stocks going forward. The returns after the oil spikes are similar to the returns you would expect at anytime since 1989.

50% spike

For those curious, the individual returns after spikes are in the table below. As you can see, the recent signal occurred on March 8, and the SPX gained more than 7% in the month since then. The last four occurrences have led to double-digit returns over the next year. The recent signal was the only time there was a 50% spike in four months to over $100, so we don’t have another data point combining the two ways I analyzed this.

4 Months

 

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