A Longer-Term Look at Oil Prices and Stock Prices (II)

Using annual data for as far back in history as figures available on the U.S. Energy Information Administration's website take us, I find:

(Oil prices are from: http://www.eia.doe.gov/emeu/international/petroleu.html#IntlPrices)

Data Period: 1862 to 1999

Average Annual % Change
Oil: 7.9%
S&P 500: 6.7%

Correlation: -0.07
Percent of Years with "Same Sign" Price Change: 66/138 = 48%
Percent of Years with "Opposite Sign" Price Change: 72/138 = 52%

Quintiles Sorted in Order of Decreasing Annual % Change in Oil Price
Quintile: Average Annual % Change in Oil vs. S&P 500
I: 63.3% vs. 2.0% (correl. = 0.08)
II: 10.4% vs. 5.6% (correl. = 0.01)
III: -0.3% vs. 8.6% (correl. = 0.16)
IV: -8.1% vs. 8.0% (correl. = 0.15)
V: -28.6% vs. 9.3% (correl. = 0.23)

The data show lower (higher) stock market returns when oil prices rise (fall). However, the correlations are low, indicating only weak reliability of this inverse relationship. Also, as we had seen with the daily data, the frequency of opposite-directional price movement is close to what we would expect based on chance alone.

Below I list the years showing the most extreme oil price movement:

Date: % Change in Price of Oil vs. S&P 500

Years with Largest RISE in Price of Oil
1974: 252% vs. -30%
1863: 200% vs. 38%
1864: 156% vs. 6%
1979: 121% vs. 12%
1862: 114% vs. 55%

Years with Largest FALL in Price of Oil
1878: -51% vs. 6%
1873: -50% vs. -13%
1986: -48% vs. 15%
1931: -45% vs. -47%
1921: -44% vs. 7%

Similar to what we saw when we looked at the impact of inflation and interest rates on stock prices in prior posts, the relationship between oil prices and stock prices does not appear to have much regularity to it. In other words, rising oil prices might make eye-catching headlines and induce traders to sell stocks in the short run, but in the longer run oil prices are not a good indicator of stock market direction.