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.



Justin is a Managing Director and Portfolio Manager at Newfound Research, a quantitative asset manager offering a suite of separately managed accounts and mutual funds. At Newfound, Justin is responsible for portfolio management, investment research, strategy development, and communication of the firm's views to clients.

Justin is a frequent speaker on industry panels and is a contributor to ETF Trends.

Prior to Newfound, Justin worked for J.P. Morgan and Deutsche Bank. At J.P. Morgan, he structured and syndicated ABS transactions while also managing risk on a proprietary ABS portfolio. At Deutsche Bank, Justin spent time on the event‐driven, high‐yield debt, and mortgage derivative trading desks.

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.