Do Oil Prices Directly Affect the Stock Market?

Articles I have read in the distant past on this topic suggest a couple of points:

  • Different events and world situations do appear to result in different global reactions as to economies, politics, and markets … therefore, trying to develop a one-size-fits-all-rule on the topic of oil is difficult to do for the long term (and it is the long term that is important at the end of the day since investing needs to have a long term focus rather than a minute-by-minute focus).
  • The rate of change of prices has more of an impact on the economy than the actual price itself since the ability to absorb and adjust to new prices takes a while. So, a rapid increase has more of a short term effect than a slower increase.
  • There is a link between oil and gas prices … but please don’t confuse gas price linkage with stock market linkage; the later is what the Cleveland Fed discusses below.

Andrea Pescatori and Beth Mowry at the Cleveland Fed in 2008 find that correlations of oil prices and markets may change over time and that the positive correlation between the two affects Dow Transportation sector stocks the most; financial sector stocks the least (in other words the effect depends on how much oil/fuel any market segment depends on … duh!).

Now … notice that this was published in 2008 when oil prices peaked at their historic highs. Nothing has changed fundamentally that would alter the conclusions of their research.


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