Stock markets often perform better when oil prices are rising.
The market has been in decline since the Middle East wars began. And that decline has accelerated in recent business days as oil prices soared. As I write this on Monday morning, March 9, the price of Brent crude oil, the international benchmark, is around $104 per barrel. This is about $33, or 47% higher than the price the day before the dispute began.
That caused panic in the stock market. of Chicago Options Exchange Volatility Index The VIX index, also known as the stock market fear index, rose to 31, its highest level in nearly 11 months, and 12 points higher than the day before when the United States and Israel launched their first salvo against Iran.
and, S&P500 The index has fallen more than 3% since the start of the war, amid investor concerns that soaring oil prices could slow global economic growth, possibly pushing the global economy into recession and boosting inflation. That’s because while energy costs are a major expense for most households, crude oil is used to make countless other products, from plastics to fertilizers. Slower growth and higher inflation are never good for the stock market because they equal stagflation.
What rising oil prices typically mean for long-term market performance
But investors may be surprised at how the market fares during an extended period of rising oil prices. Ritholtz Wealth Management compared market performance in years when oil prices rose with market performance in years when prices fell.
Interestingly, since 1986, the S&P 500 index has returned an average of 11.1% in years when oil prices were falling, compared to 13.1% in years when oil prices were rising. One reason for this is that higher oil prices often indicate increased oil use in a growing global economy, which means more factories, more air travel and commerce, and more overall energy use.
Furthermore, when oil prices rise 5% for two days in a row, as they did last week, stock prices almost always rise one month, three months later, six months later, and 12 months later.
Indeed, the current rise in oil prices is not about economic growth, but rather concerns about oil shortages, as the war appears to be escalating while shipping through the Strait of Hormuz, through which about 20% of the world’s oil is transported, has been halted.
But investors with more than a few years left until retirement should remember that even though the market may dip or correct from time to time, there is a consistent pattern in which stocks will eventually recover and move toward new highs. Unless you need to cash out your investment in the next year or two, the best course of action is to hold positions in fundamentally sound, well-run companies.
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