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Chart of the Day: Brent Crude and the S&P 500 Index

By JLP | June 4, 2012

Interesting chart I found on the WSJ website late last week:

Correlation between Brent crude and the S&P 500

This chart compares Brent Crude—the oil used to make gasoline—and the S&P 500. I wish I had the numbers going back further than this because it would be interesting to see the correlation over the years. I would think the correlation would be almost non-existent prior to oil’s massive runup in the early 2000s. All I know is that lately it seems as though when the stock market goes up, the price of oil goes up too. When the stock market drops, the price of oil drops. It almost looks as though the price of oil dictates where the market is going. I could be totally wrong on this (I’m not an analyst), but it’s what it looks like to me.

All this brings up a question:

Are high oil prices bad for the economy?

Topics: Investing, Oil, S&P 500 Index | 4 Comments »


4 Responses to “Chart of the Day: Brent Crude and the S&P 500 Index”

  1. Mark Says:
    June 4th, 2012 at 11:57 am

    Perhaps it is the other way around – the stick porice drives the oil price. Or perhaps both are correlated to the general market opinion of future economic growth. Strong growth implies high oil demand, hence a higher oil price. And strong growth forecasts also imply optimism about profits, and hence high stock prices.

  2. Jack Says:
    June 4th, 2012 at 12:45 pm

    I’m also in the “correlation not causation” camp. It looks like investors buying stocks and oil futures. Some days they’re in an UP mood, and other days they’re in DOWN mood.

  3. Valkyrie Frost Says:
    June 7th, 2012 at 8:49 am

    That is very interesting, yet I agree with both Mark and Jack. A deeper look into the relationship might reveal a direct correlation and it might not. The one item not mentioned above is the effect of inflation on both the market and oil. Could inflation (real or otherwise) be driving both?

    Are there other commodities also following this pattern?

  4. Valkyrie Frost Says:
    June 7th, 2012 at 8:56 am

    To address JPL’s question of “Are high oil prices bad for the economy?” I think the answer is yes, but only to a degree. In the short term, higher oil prices hurt the economy because it’s adds unplanned cost. Yet, over time, we adjust both our expectations and our usage habits.

    Cases in point: In the mid 70’s, oil prices spiking caused consumers and producers to seek out smaller, more fuel efficient vehicles. With low oil prices in the 90’s and early 00’s. The American consumer went crazy on buying gas guzzling SUV’s and sports sedans. With the econ crash and higher oil prices of the last 5 years, the market for fuel efficiency has returned.

    The best word that describes the American consumer is “gluttony” with regards to both food and all natural resources.

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