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Is Energy About to Break Its Correlation to the S&P 500 Stock Market?

Let's investigate patterns and alleged patterns in the S&P 500 vs RYE, an S&P energy index.
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S&P Energy vs S&P 500 courtesy of Stockcharts.Com annotations by Mish

S&P Energy vs S&P 500 courtesy of Stockcharts.Com annotations by Mish

Oil Stocks Correlated to Market?

Bloomberg reports Oil Stocks Negatively Correlated to Market First Time Since 2001

My chart suggests otherwise and Bloomberg's chart in the article displays as a blank chart so we cannot see precisely what the author means.

The article notes "The energy index has climbed 39% this year while the broader index has fallen 6% and the S&P 500 Information Technology Index is down 10%. Analysts say the divergence has historically preceded recessions."

These correlations are similar to the thesis that gold follows the dollar. On a day-to-day basis gold usually follows the dollar, but the relationship goes to hell over longer periods of time. 

For example the US dollar index is now about 99. It was 99 in 2020, in 2017, 2015 and 2003. In 2003 gold was $310 with the dollar index at 99. No, gold does not  follow the dollar. 

From 2014 to 2019 energy mostly had an inverse relationship with the S&P 500.

In mid-2014 the RYE index was at 79.13. Pre-Covid it fell to the $36 level. Meanwhile the S&P 500 rose from 1600 level or so to the 2750 level. 

It's a huge stretch to make the Bloomberg headline.

Where To? 

“The relationship will normalize again, most likely on the downside,” Stifel Nicolaus analyst James Hodgins said. “For energy prices to fall significantly, we could be talking about a recessionary type situation in which case the S&P 500 would also likely fall significantly and therefore the correlation would come into positive territory again.”

How About This Idea?

Recession? Demand Destruction? 

I agree with the idea that a recession is coming. I also think stocks in general will get clobbered.

The question for oil stocks pertains to demand destruction vs supply chain  disruptions. 

The demand for oil is mostly inelastic. The elastic portion pertains to vacation travel. An inelastic downside risk comes from huge job losses. But will there be enough  job losses to ease demand?

 Might We See a Minimal Job Loss Recession? Why Not?

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On march 21, I asked Might We See a Minimal Job Loss Recession? Why Not?

To recover jobs to the level they were at pre-Covid, the economy needs 152,504,000 minus 149,721,000 jobs (2,783,000).

But to recover to the trend the economy needs 6,279,000 jobs.

What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

The answer is nothing or next to nothing. Rates hikes will not impact inelastic items.

For discussion, please see What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

Bubbles Will Pop

If you think the Fed can fix decades of easy money and reckless Congressional spending while not remotely understanding inflation, you are only nuts.

Most People Have No Idea How Much Stocks are Likely to Crash

But energy is a demand destruction vs supply chain destruction issue, not just in the US, but globally. 

Until recession hits, energy is a much better bet than the S&P 500 or technology stocks, and perhaps if not probably, even then. 

This post originated at MishTalk.Com.

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