Recovery in oil demand supports bullish stock market momentum

(Bloomberg) – The stock market’s rapid recovery from the 2020 crash and the more or less steady rise since then has been hailed not only as historic, but also a sign of overheating. Still, equity bulls may have been right after all, at least based on demand for oil as an indication of economic growth.

The demand for oil is not the only one showing this trend. The stock market also posted the fastest recovery in history. After the S&P 500 fell 35% last year, it took just five months for the benchmark US equities to recoup those gains. Even after two technical fixes in the second half of 2020 and small drawdowns in 2021, stocks are often hailed as too exuberant or overheated.

But if the asset class is supposed to measure economic growth, perhaps that is exactly what it is doing since demand for oil reflects similar dynamics. After all, the 40-day correlation between stocks and oil prices has been historically high. In other words, the oil market can serve as a roadmap for the stock market as both are meant to measure underlying growth. For investors, the question in 2022 will be whether a deceleration in global economic growth begins to hurt both oil and equities, or if both risky assets continue to climb, just at a slower pace.

© 2021 Bloomberg LP

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Felix J. Dixon