Marketview – Oil and the Markets

Mar 15, 2016 | Blogs

Terry Sawchuk Founder & Chairman

The Market

With Saint Patrick’s Day this week many people start to think about leprechauns, 4-leaf clovers and green beer. My personal thought about green beer is why bother adding color to a perfectly drinkable ale. This got me to wondering about who’s idea was it to make beer green in the first place. The origin most likely started with the Irish tradition of dropping a clover into one’s drink and downing it for good luck. The first recorded history of actual green beer occurred in 1914 in New York City.

Does history have a tendency to repeat itself? Or, is it really different this time? When it comes to oil prices and the stock market it is hard to say. Currently, the stock market seems to be in lock step with oil prices. As oil moves up, the markets seem to follow. As oil falls the market once again seems to move down. Has this phenomena always been in place or is it just different this time?

Time for another look into the history books. In 1973 OPEC proclaimed an oil embargo which resulted in oil prices climbing over 33%. That very same year the S&P 500 was down over 18%. In 1979 oil prices doubled as a result of the Iranian Revolution and conflicts in the Middle East. The S&P 500 in 1979 was up over 11%. Interesting to see that in the 1970’s on 2 separate occasion’s oil prices and the stock market were NOT in lock step with each other.

The 1970’s are far removed from current day with no high speed computer trading, no social media and no internet. How have things compared in more recent times? In 2008 oil prices reach an all-time high of over $145 per barrel. I think most of remember that S&P 500 didn’t have a very good year in 2008 and was down over 38%. Just last year oil prices were down over 20% but the S&P 500 was virtually unchanged.

As with most theories, there are 2 sides. Higher oil prices will result in higher profits for the oil companies, more jobs in the oil sectors, and more interest in alternative energy. However, there is a downside. Higher prices mean higher prices at the gas pump, less disposable income to be spent on other things, higher shipping costs and higher travel costs. The list for lower oil prices would basically just be a reverse.

What does this tell us? First, historically oil prices and the stock market are not always in lock step. Second, and more importantly, this too will pass. In all likelihood the strong correlation of oil prices to the stock market. The interesting part here is that a positive spin can be placed on both higher and lower oil prices. It is only a matter time before oil becomes unhinged to the stock market.

Why the history lesson? Terry and I spend much of our day looking at the markets. The markets are always changing and important factors driving the markets one day are replaced by other factors tomorrow. This analysis of oil provides a glimpse into 1 very small piece of the type of factors we review. We review technical charts, fundamentals, economic policy, monetary policy, geopolitical issues and more in an effort to provide sound and prudent investment advice for our clients. We are watching the store. As always, we appreciate your trust and confidence.

Happy Saint Patrick’s Day. Cheers!

Best regards,
Terry Sawchuk

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