Peak Oil, Peak Stocks

The Wall Street Journal reports that the correlation between stock prices and oil prices is near 70%, which more than doubles the rate in 2008 (article here). There are a variety of theories posed as to why this might be the case: psychological links, algorithmic trading, risk trading, etc.

I think all these things have a role, but I am also inclined to think that the strength of the correlation is likely to come and go over time. Right now, the expectations for oil consumption are tied largely to an economic recovery. The stock market is often used as a proxy for such a recovery. Thus, if the stock market goes up, people expect oil consumption to go up, and oil prices rise, too (and vice versa). If there were some major change in oil supply, regardless of the market, oil prices would go up, even if stock prices plummeted.

I’d be curious to see the data over a longer period of time. I suspect that the correlation is higher today that in years past because it is my sense that there are more people with money in both markets that in prior generations. However, I also suspect that there are periods where the correlation would increase and decrease in the same way it has over the past few years.

--Joshua Fershee