Personal Wealth Management / Expert Commentary
Ken Fisher Debunks: the Oil and Stock Correlation
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher debunks the myth that oil prices drive stock prices. Many investors worry that persistently elevated oil prices this year could deter a stock market recovery. Ken notes, however, a long history of oil and stock price data proves there is no correlation between the two.
The logic goes that if consumers are forced to spend more money on petroleum-based products like gasoline, they spend less money on other goods—impacting demand and driving lower economic activity. The reality, according to Ken, is that regardless of where consumers spend their money, they are still contributing to GDP.
A man appears on the screen wearing a navy suit, sitting on a chair, behind him is a white screen with the title “Debunkery”
He begins to speak.
Ken Fisher: Whenever you hear intuitive common sense, there's two things you should do.
On the white screen a title appears “DEBUNKERY” with subtitle “Seeing Through Wall Street’s Money-Killing Myths”
Ken Fisher appears back again in the same position.
Ken Fisher: You may have heard that oil prices are high these days. You'd have to kind of be in the upper end Amazon basin fleeing humanity to not know that. But there's a general myth or what I call a bunk concept that I wrote about years ago in my book Debunkery that high oil prices cause stocks to behave badly.
Ken Fisher: Now, I understand the thinking behind this and I think you do too. The idea is, well, lots of us have to do things like drive a car to get to work or to go to the grocery store that uses up gasoline. We have to heat our house. If we spend more on that, that's money we don't have to spend on other things that make the economy bad. You're familiar with that logic. Let me just tell you that's intuitive common sense. And whenever you hear intuitive common sense, there's two things you should do. One, check to see if you can actually play the math in inverse to see if it's really true. And two, check to see if there's an actual long history of oil prices and stock prices and see how they correlate. Now, in this case, we can play this both ways, but we want to always think globally first. That's the right way to think, if you possibly can. And, let's think about that person who only has $100 to spend and is before the price of oil goes up is spending $25 of that on things that derive from petroleum products and $75 on other stuff. That person's contribution to GDP is 100. If you cannot add 25 and 75 and get to 100 and this is the only advertisement I'm going to make today here.
Ken Fisher: if you can't add 25 and 75 and get to 100, you probably really do need professional help with your money management. But having said that, let me just say that if the price of oil goes up by 15 from 25 to 40 now that same person, instead of 75 to spend on everything else, only has 60 to spend one everything else, which is what you feared. But note when you put the two together, it's still 100 contributed GDP. It's just different sources that get it. And in the real world, price of oil going up tends to make the oil companies more profitable, not always, but often, makes the energy stocks do well and then makes some other companies less profitable and makes their stocks do less well. The less well or the more well is largely a function of whether the market saw the price increase coming at them or not, whether the market is surprised by it or it already priced it into the stocks.
But the reality is it doesn't change the GDP feature.
On the screen behind Ken Fisher a chart appears, the chart is showing oil price and S&P 500 Total Return Index Since 1980.
Ken Fisher: Now, the other point that I want to make, and I did this in my Debunkery book, but I did it years ago when I was young, I used to believe this stuff because when I was young it wasn't easy to access mega data fast. The rise of PCs started to allow for that. But it's just really easy to go online and get the price of oil going back pretty much as far as you want and the price of stocks going back pretty much as far as you want and overlay them and see what is the correlation between them. Now if the correlation between two things comes out to be perfect so that when the one goes up, the other goes up, when the one goes down, the other goes down. When you run a correlation, you'll get a number of one. If they're exactly the reverse the one goes up, the other goes down, or vice versa, then you'll get a negative one. The fact of the matter is you can look up how to do this online. You can do it yourself if you can't hire a teenager to teach you how because it's pretty simple. And when you do that with oil you find in the very long term the correlation has been zero. The correlation coefficient of oil to stocks is zero. And in fact, if you take 15-year time periods rolling along you can get a little way away from zero but not very far. What is that saying? It's saying that the price of stocks and oil come from everything but the price of stocks and oil. I just want you to think about that. Repeat after me everything but. Everything but. Everything but.
Ken Fisher: There's actually no consistency whatsoever of the price of oil going up and stocks doing anything in particular. Let me take you to some recent examples and some logic on this, just some recent history. The price of oil has been recently above $100 whether you use WTI or Brent. The fact of the matter is those prices we can track a long way back and they were above $100 pretty much steadily between 2011 and 2014. Now $100 then was worth more than $100 now because there's been some inflation in the meantime. But in that time period, corporate earnings grew; the stock market rose by 60%; there was not massive inflation. And the theory that people believe rising oil must be bad for stocks, that period alone should teach you that you pretty much all live through and can easily go back and see the modern history of by looking online as not true. And it's not true because you know what? It's not true.
On the screen behind Ken Fisher the sentence “The price of oil does not drive stocks” appears.
Ken Fisher: I want you to repeat after me the price of oil does not drive stocks. Everything, but everything else matters. The price of oil tends to be in the market and not driving stocks. So with that, I just want to, as I did throughout my book Debunkery, which I wrote some years ago, express to you that this, like so many other commonly accepted pieces of conventional wisdom, are both wrong and easily disproved by just simply looking at continuous price periods of A and B and seeing if there's a correlation there. If there's no correlation, there can't be causation, and in oil and stocks, there is none. Thank you very much for listening to me.
A half white half red screen appears.
Ken Fisher: I very much hope you enjoyed this video, part of my series on debunking Common Market myths. To watch more videos like this, click the link on the screen and make sure to subscribe to Fisher Investments YouTube channel.
Thanks so much for listening to me.
Ken Fisher finished talking, and
A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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