In reviewing financial commentary, Fisher Investments UK often finds arguments spiking oil prices spell trouble for equities, as consumers’ wallets tighten and companies’ costs rise. Similarly, when oil prices fall, publications we read frequently forecast good times for equities. However, Fisher Investments UK’s review of market history shows oil prices and equities don’t have a reliable causal relationship. Equities can and have climbed and fallen with oil prices or counter to crude’s swings, as we will show.
A review of the past 20 years yields some high-profile examples fuelling the popular notion oil prices and equities are strongly negatively correlated (i.e., that they routinely move in opposite directions). For example, during 2007 – 2009’s financial crisis, global equities entered a bear market (a long, fundamentally driven equity market decline of -20% or more) in October 2007 amidst a backdrop of rising oil prices.i When oil peaked at $145.65 per barrel in July 2008 – nearly tripling the $49.95 from January 2007 – global equities had fallen -14.5%.ii Or go back to the start of the century. Fisher Investments UK saw oil prices more than doubled, from $16.51 per barrel in November 2001 to $34.94 in March 2003 – a stretch that coincided with the latter half of the bursting Tech bubble’s global bear market, in which equities fell -34.0%.iii This alleged relationship between equities and oil appeared to manifest recently, too, when oil prices jumped from $77.24 per barrel in December 2021 to $133.18 in March 2022 as equities fell -10.4%.iv On the flipside, falling oil prices have also coincided with rising equities: from June 2014 to December 2015, oil prices plummeted $115.19 per barrel to $35.26 whilst equities climbed 12.3%.v
But that doesn’t mean the two are actually negatively correlated. Fisher Investments UK’s review of market history reveals many times when oil prices and equities move together, too. Both plunged in the latter half of the 2007 – 2009 financial crisis: as oil prices fell from $145.65 per barrel in July 2008 to $33.73 in December 2008, equities dropped -11.4% – and the latter kept falling until bottoming in March 2009. vi At the onset of the 2020 pandemic, equities and oil plummeted together following government-induced lockdowns: equities endured a bear market, falling -26.1%, from February – March, which overlapped with oil prices’ tumbling from $70.25 per barrel to $9.12 a barrel between January – April.vii Oil prices and equities have also risen alongside each other, Fisher Investments UK notes. During the mid-2000s, oil prices more than tripled, from $23.23 per barrel to $78.26, an ascent that coincided with a global bull market that ended in late-2007.viii The two assets also recovered following the financial crisis, as oil rebounded from $33.73 in December 2008 to $128.14 per barrel in March 2012 whilst global equities began a decade-long bull market in March 2009.ix
In Fisher Investments UK’s view, these stretches of tight positive and negative correlation hint at oil and equities lacking a strong link over the longer run. To see this, consider the correlation coefficient between the MSCI World and Brent crude oil prices, which is 0.31.x A correlation of 1.0 means they always move together, whilst -1.0 means they move exactly opposite. The 0.31 correlation coefficient implies the two move in the same direction modestly more often than not, but it isn’t high enough to infer any reliable causal relationship, in our view.xi Hence, we conclude that oil prices don’t dictate equities’ direction.
According to Fisher Investments UK’s review of oil and equities’ demand drivers, the lack of a relationship isn’t surprising. Consider: prior to 2007, equities and oil prices rose amidst a growing global economy – driving earnings and oil demand.xii But in 2007, the global financial crisis emerged as bank lending froze. Efficient equity markets quickly priced in the likely impact on company profits, in our view. Later on, as a recession and the probability of tumbling oil demand became apparent, oil prices sank.xiii Similarly, in 2020, as COVID spread, we think government-induced lockdowns halted the global economy, in our view. Whilst equities and oil prices plunged, we think the former priced in the economic impact and recovered before oil demand.xiv Or look at 2022. Following Russia’s Ukraine invasion, fears about oil supply sent prices sky high.xv Yet Fisher Investments UK thinks these concerns were more rampant than the disruptions themselves, as we found impacted nations adjusted and adapted – oil prices peaked in March before easing for the rest of the year.xvi For equities, though, oil supply concerns were one of many worries – including inflation and rising interest rates – weighing on sentiment and returns through June.xvii
Whilst oil prices’ relationship with global markets is limited, in our view, they do have an outsized impact on the Energy sector. According to Fisher Investments UK’s research, Energy companies’ earnings and revenues are more oil-price sensitive than volume sensitive – meaning rising prices boost profits more than the quantity of oil produced. That said, the sector comprises only 4.6% of the MSCI World Index’s market capitalisation.xviii So whilst oil price trends can have some effect, Fisher Investments UK finds they aren’t a swing factor for global markets overall.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:SQ), Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
i Source: FactSet, as of 1/6/2023. Statement based on MSCI World Index returns with net dividends and Brent crude oil spot prices, 12/10/2007 – 4/7/2008 and 12/1/2007 – 4/7/2008, respectively.
ii Ibid. Brent crude oil spot prices and MSCI World Index returns with net dividends, 12/10/2007 – 4/7/2008. Brent crude oil prices are quoted in US dollars globally.
iii Ibid. Brent crude oil spot prices and MSCI World Index returns with net dividends, 15/11/2001 – 10/3/2003.
iv Ibid. Brent crude oil spot prices and MSCI World Index returns with net dividends, 31/12/2021 – 8/3/2022.
v Ibid. Brent crude oil spot prices and MSCI World Index returns with net dividends, 19/6/2014 – 22/12/2015.
vi Ibid. Brent crude oil spot prices and MSCI World Index returns with net dividends, 4/7/2008 – 26/12/2008. Financial crisis dates based on MSCI World Index returns with net dividends, 12/10/2007 – 4/7/2008.
vii Ibid. MSCI World Index returns with net dividends, 20/2/2020 – 16/3/2020, and Brent crude oil spot prices, 6/1/2020 – 21/4/2020.
viii Ibid. Brent crude oil spot prices, 9/4/2003 – 9/8/2006, and MSCI World Index returns with net dividends, 12/3/2003 – 12/10/2007. A bull market is a long period of generally rising equity prices.
ix Ibid. Brent crude oil spot prices and MSCI World Index returns with net dividends, 26/12/2008 – 13/3/2012 and 6/3/2009 – 20/2/2020, respectively.
x Ibid. MSCI World Index price returns in local currencies and Brent crude oil spot prices, weekly, 13/6/2003 – 9/6/2023. The correlation coefficient is calculated in local currency to avoid foreign exchange currency skew. Currency fluctuations between the dollar and the pound and other international currencies may result in higher or lower investment returns.
xi Ibid.
xii Source: FactSet and the World Bank, as of 1/6/2023. Statement based on MSCI World Index returns with net dividends, Brent crude oil spot prices and world gross domestic product (GDP, a government produced measure of economic output), 12/3/2003 – 12/10/2007.
xiii Source: FactSet, as of 1/6/2023. Statement based on Brent crude oil spot prices, 4/7/2008 – 12/3/2009. A recession is commonly defined as a broad decline in economic output.
xiv Ibid. Statement based on MSCI World Index returns with net dividends and Brent crude oil spot prices, 20/2/2020 – 16/3/2020 and 6/1/2020 – 21/4/2020, respectively.
xv Ibid. Statement based on Brent crude oil spot prices, 24/2/2022 – 8/3/2022.
xvi Ibid. Statement based on Brent crude oil spot prices, 8/3/2022 – 31/5/2023.
xvii Ibid. Statement based on MSCI World Index returns with net dividends, 8/12/2021 – 16/6/2022.
xviii Ibid. Energy sector as a percentage of the MSCI World Index’s market capitalisation (a measure of company size calculated by multiplying shares outstanding and current share price).