Crude Oil vs Stock market in correlation 1-Dec-2014

Crude oil price has declined for last two months in large scale while the stock market look competitive in major stock indices.

Basically simply thinking, oil importer have benefit from the oil price down and exporter will suffer from it.

For example, US, UK and Japan has imported oil more than exporting, and they should have benefit from oil price down.

< Figure I > 75% of correlation

However, looking at stock market, it seems that they have not always had the benefit.

Figure I shows 20yr historical values of Dow Jones industrial average [USD] and WTI Crude Oil price [USD]. The correlation of them is around 75%, which means the stock index and oil price are highly correlated each other.

< Figure II > 52% of correlation

Figure II shows 20yr historical values of FTSE 100 [GBP] and WTI Crude Oil price [USD]. The correlation of them is around 52%. It is less than US market, but it could be said highly correlated.

Figure III shows 20yr historical values of NIKKEI 225 [JPY] and WTI Crude Oil price [USD]. Different from US and UK market, the correlation between the stock and oil price is around -40%, which means the stock price tends to go up while the oil price goes down.

Observing WTI Crude Oil price, the largest declining has been occurred at Lehman crisis, and larger up & down for last 2-3 years.

< Figure III > -40% of correlation

The point is whether current downward trend is just a part of up & down or beginning of oil crisis.

If the oil price is going down further, it concerns the stock indices which are highly correlated can be going down.

Even in Japanese stock market, the stock price has largely declined while the oil price is going down.

Global stock market has been volatile particularly for last a few months, and the oil price is remarkably going down. The low oil price bring benefit for oil importers but it may cause deflation in the market and this can be a downside factor in stock markets.

It will not wasted to re-balance risky portfolio into conservative now.