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No. 1: If oil price goes up, stock prices will fall. This is because the cost of doing business will increase and stock prices must factor this to account for the drop in earnings. i.e. oil price and stock price are inversely related
No. 2: During an economic downturn, business and production slowed, and hence the demand for oil drops. i.e. oil price and stock price rise and fall in tandem.
Which is correct? 1 or 2? Or both are wrong?
Ken Fisher did an analysis on the correlation between oil and stock (S&P 500). From 1982 to 2005, the correlation coefficient is -0.11(0=no correlation, 1=positive correlation, -1=inverse relationship) which is close to no correlation at all. The R-squared figure becomes 0.01, which means that only 1% of stock price movement is affected by oil prices. It would be better off paying attention on the other 99%.
And for the correlation between oil prices with Britain’s stocks (FTSE All-share), the correlation coefficient is -0.09, and R-squared is 0.01. Same case. Read more...
Hi
I have been spending last years trying to find correlation between Gold, Oil, US dollar, Stocks.
IMO it is not correct to say there is no correlation, there is actually some relationship between them in some ways.
Sharp rising of oil do critically affects some business sectors
It is good that you have done some research.
Personally, I do not rely on the correlation to make my trades. So I am not really concern if there is any relation.