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How oil prices affect U.S stock market?

The purpose of Stock market is to provide a platform for the investors or to facilitate the investors where they can invest their assets and buy or sell their securities and can earn more profits with minimum risk of loss.
Crude oil is one of the most important energy resource for the global economy. That’s why the fluctuations in crude oil prices may affect the stocks. According to the recent research there are probably 60% of the things we used in our daily life or in business activities are made up of Crude oil.
The U.S stock market is comprised of thousands of various individual stocks of different sectors including oil and gas sector, but unfortunately there is no proper way to evaluate that how crude oil prices will affects U.S stock market.It is also very difficult to ascertain how stock price will behave in response to the surge or decline in the oil prices. But according to the previous research on this topic, we can say that crude oil prices may affect U.S stock market either positively or negatively.
By keeping this thing in mind, we will find out the relationship between crude oil prices and U.S stock market and how  will they affect each other. For this purpose we have selected the data of 6 months from April 2016 to September 2016.We have taken Standard and Poor 500 index to represent the US stock market. We have taken oil prices as an independent variable and standard and poor 500 composite indexes were taken as an dependent variable.

Table 1

Months Crude Prices/Barrel ($) S & P 500(points)
September 2016 44.41 2156.52
August 2016 44.70 2,177.48
July 2016 41.60 2,148.90
June 2016 48.33 2,083.89
May 2016 49.10 2,065.55
April 2016 45.92 2,075.54

In the above table 1 you can see that how crude oil prices fluctuate and how they will affect on S&P 500 index. As we all know that correlation analysis is used to know about the relationship or linkage between two variables.Correlation coefficients can run from -1.00 to +1.00. The estimated value of -1.00 shows that there is significant negative relationship between independent variable and dependent variable, whereas positive value of +1.00 shows the significant positive relationship between the variables and the value of correlation is denoted by “r”. However the zero value shows that there is no relationship between the variables.
Crude oil was trading $45.92 a barrel in April 2016 and  in September 2016 it was trading  at $ 44.41 a barrel which is significant drop. According to the above results the correlation value is (r = -0.769962593) which shows that there is strong negative relationship between the crude oil prices and U.S stock market (S&P 500 index).
Let me explain it more easily, the negative correlation shows that there is statistical relationship between the Crude oil prices and U.S stocks and they generally move in opposite direction in price action. For example : If the crude oil prices increases the amount of stocks decreases and vice versa. The concept of negative correlation is important in the construction of portfolio, so investor should look for some negatively correlated assets to protect against volatility for the overall portfolio. The negative correlation doesn’t mean that stock market is completely influenced by the oil prices .The negativity or positivity in the stock market can be attributed to shares of other companies.The above calculation is just a rough analysis about the movement of stock market vis-a-vis fluctuations in the oil prices.

 

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About Emaad Qureshi