Historically High Correlation Between Equity & Oil Prices Has Moderated by Eric Bush, CFA – Gavekal Capital
The historically high correlation between equity prices and oil prices that existed early this year has moderated somewhat. The 200-day correlation between Brent Crude Oil and the MSCI World Index remains elevated at 46%. However, we would expect to see this drop over the coming months as the 65-day correlation has fallen quite a bit from a high of 57% on 4/19/16 to 38% as of yesterday. As the chart below shows this is still a very elevated level relative to the last 35+ years of history. We will be keeping a close eye on whether the 65-day correlation drops back into the long-term historical range. If it doesn’t then this could be a sign that a regime change has taken place for this relationship.
Equity & Oil Prices
The correlation between US equity prices and global equity prices has also fallen significantly over the past several months. In fact, the 65-day correlation, currently at 41%, is the lowest level in nearly two years. Correlation among this pair tends to spike to around 70% during times of market turmoil as evident in 2008, 2010 and 2011.
Stocks and bonds continue to have a fairly high positive correlation. The 65-day correlation between the S&P 500 and the 10-year treasury is currently at 43%. This is well below extreme levels reached in 2002 and 2011, however, it is also well above the levels seen during most of the 2002-2007 period.
Lastly, the negative correlation between WTI and the VIX has moderated quite a bit since April. On 4/14/2016, the correlation between WTI and the VIX was -49%, the most negatively correlated it had been at any time in roughly three years. It currently is at -24%. It is worth pointing out how the relationship between oil prices and the VIX seems to have changed in the post-GFC world. Prior 2009, this relationship had a relatively stable positive relationship. Since then the relationship has moved to a negative correlation the majority of the time.