As the news cycle spins faster and faster, we are seeing more and more market observations based on gut feelings. One such observation that I have heard recently is that oil and energy are driving stocks more than ever before.

I thought we would look to the hard data in our own version of MythBusters. So what does the data say?

Below we plot three sets of rolling 1-year correlations using data from Fama/French and FRED:

  • The correlation of energy stocks and oil prices (ENERGY/OIL)
  • The correlation of energy stocks and broad U.S. stocks (ENERGY/MARKET)
  • The correlation of oil prices and broad U.S. stocks (MARKET/OIL)


Source: Kenneth French data library, FRED, Newfound Research

A few observations:

  1. There has been a recent spike in all three correlations since near-term lows were hit in mid- to late-2014.
  2. In all three cases, current correlations are above the long-term average over the 1986 to 2015 period we studied. Elevated correlations are much more prominent in the MARKET/OIL and ENERGY/OIL cases then in ENERGY/MARKET. (ENERGY/MARKET correlation is at 0.72 compared to a long-term average of 0.69; MARKET/OIL correlation is at 0.29 compared to a long-term average of 0.08; ENERGY/OIL correlation is at 0.66 compared to a long-term average of 0.35.).
  3. However, these elevated correlations seem to have less to do with the recent oil crash than they do with a regime shift post-global financial crisis. In fact, current correlations are actually lower then the average level from March 2009 to December 2015.

Conclusion: The idea that oil is driving stocks more than ever rates as partially true. Correlations are above long-term averages. However, this seems to have less to do with recent oil volatility than it does with an overall correlation trend that has existed post-2008.



From 2012-2019, Justin Sibears served as Managing Director and Portfolio Manager at Newfound Research. At Newfound, Justin was responsible for portfolio management, investment research, strategy development, and communication of the firm's views to clients. Justin holds a Master of Science in Computational Finance and a Master of Business Administration from Carnegie Mellon University as a well as a BBA in Mathematics and Finance from the University of Notre Dame.