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In the Market - June 2008
Jun 15, 2008
What is Oil's Impact on the Stock Market?
Oil producing countries tend to have strong economies during periods of rising oil prices as witnessed by their rising stock markets. Surprisingly the stock markets of countries that are net consumers of oil, such as the U.S, do not show an inverse sensitivity to the price of oil.
Using RiskMetrics predictive stress tests we explore the sensitivity of global stock markets to a 10% shock in the price of oil. Over the past decade that sensitivity has changed and for countries that are net producers of oil like Canada, Norway and Great Britain we see their stock markets have displayed an increase of two to three times the correlation to oil over just the last three years. The U.S. which is a net consumer of oil, however, has not shown any significant change in its correlation with the price of oil and if anything it has become more muted.
Despite headlines blaming higher oil prices for selloffs in the S&P, our analysis over longer time frames does not support this conclusion. One possible explanation for the muted relationship is that unlike previous supply constrained oil rallies, the current rally is a function of higher global demand. However, current U.S. GDP data seems to contradict this explanation. Alternatively, the rise in value of the energy sector to over double its weight in the S&P since the start of the decade may provide a balance to the U.S. equity market. For questions and comments, contact andy.deutsch@riskmetrics.com
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