Understanding The Disconnect In The Correlation Between Oil And Stock Prices

By David I. Templeton at Seeking Alpha on February 1, 2016

Recently a number of commentators on the weekly business shows have commented oil prices and the stock market have been moving in the same direction during the month of January. On the few days oil and stocks moved in opposite directions, the conclusion was this would be a good thing for the overall market. 

Not wanting to single out any one specific strategist, but this past Monday, Bill Stone, chief investment strategist at PNC Wealth Management, noted on CNBC, "it's not clear whether the selling will subside for now because of the tight correlation between stocks and oil prices, which he says should break at some point (emphasis added)." This comment is similar to a number of other strategists.

So what is the point then? As the below chart shows, going back to the mid 1980s the price of oil and the price of stocks have a positive correlation of .66. It only has been since October of 2013 that this correlation broke down and reversed. Since the October 2013 time period, the correlation between oil prices and stock prices has been a negative .74. In other words, market participants should be rooting for higher oil prices and a return to the positive correlation that has been evident over the long run. In all seriousness though, investors should be aware of the fact that there is a high positive correlation between oil and stock price movements.

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