Oil stocks negatively correlated to market for first time since 2001

Oil and gas stocks are challenging the broader stock market in a way investors haven’t seen in two decades.

The correlation between the S&P 500 Energy Index and the broader S&P 500 Index turned negative for the first time since 2001, fueled by a combination of rising oil prices and a sell-off in the technology sector. The energy index is up 39% this year, while the broader index is down 6% and the S&P 500 information technology index is down 10%. Analysts say divergence has historically preceded recessions.

“With oil prices as high as they have been, this is going to be positive for energy stocks and negative for the rest of the overall economy,” Commodity Context founder Rory Johnston said in an interview. . The last time the correlation between oil and gas stocks and the broader market diverged so much, the Dotcom bubble burst, he said.

The correlation between energy and the broader market has been falling since the start of the year, but Johnston said the “phenomenon has accelerated” since Russia invaded Ukraine in late February and sent oil prices above $100 a barrel while introducing new geopolitical risk. in the stock market.

The phenomenon also poses risks for investors when this correlation returns to its historically positive relationship, particularly if rising energy prices drive inflation and then a recession.

“The relationship will normalize again, most likely on the downside,” said Stifel Nicolaus analyst James Hodgins. “For energy prices to fall significantly, we could be talking about a recession-like situation, in which case the S&P 500 would also fall significantly and, therefore, the correlation would move back into positive territory.”

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Felix J. Dixon