What Recent Oil Spikes Could Mean for Stocks

Looking at several historic oil measurements following a spike in the commodity

Senior Quantitative Analyst
Sep 20, 2023 at 8:00 AM
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Oil prices have surged 30% in the past three months, approaching $100 per barrel. This has raised concerns about potential headwinds for the economy. Spiking oil prices can lead to a number of negative consequences, including inflation, interest rate hikes, and reduced consumer spending. In this article, I examine historical instances of oil price increases and see how oil and stocks performed going forward.

Past Oil Spikes

For this analysis I went back to 1990, so as not to include the very high inflation/interest rate environment of the 1970s and 80s. I found times where oil moved higher by 30% in a three-month time frame, and the table below summarizes performance following these spikes. The second table shows typical oil returns since then.

Oil has tended to outperform going forward, but only for a short time. On average, oil increased by over 3% in the next three months, while the typical one-month return was less than 1%. After that first month, however, the returns on oil after these spikes look a lot like typical oil returns.

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This next table shows how stocks performed after oil spikes. The belief that these oil spikes will hinder the stock market is only slightly supported by this data. The average return and percentage of positive returns for the S&P 500 Index (SPX) were lower after oil spikes than typical market returns at all time frames analyzed, but barely.

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I also looked at how the SPX performed during the 30% gain for oil. In this latest instance, the SPX was up 2.8% during oil’s rise. That seems normal, and sure enough, when you look at the SPX return during the oil spike, that’s close to the middle of the pack.

But pay attention at how the SPX has performed going forward after there was a 30% gain in oil and a moderate increase in the SPX (less than 5%). There are eight signals, and the summarized returns afterwards have been awful. For instance, the SPX saw an average loss of 5.87% over the next six months, with only three of eight returns positive.

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In these instances after oil gained 30% while the SPX went up less than 5% ended in long-term underperformance. After these eight data points, oil lost 1.75% on average in the next year, with just 38% of the returns positive. The returns up to that point, however, weren’t bad. Six months after these signals, oil averaged a return of just over 4%, with 63% of the returns positive.  

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