Wry & Dry

Does oil price affect S&P 500?

If W&D gets into some fine Perrier-Jouët * on a Friday night and has a headache that you could photograph on Saturday morning, has the former caused the latter?  Most likely.

But if W&D has some excellent Wagu beef on a Friday night and has a headache that you could photograph on Saturday morning, has the former caused the latter?  Most unlikely.

So W&D is hesitant to suggest a causal relationships between events.  He well remembers one of his school teachers explaining this very carefully in the Latin: "Post hoc ergo propter hoc."  That is: after it therefore because of it.

Readers will know that media commentators are always looking to explain why the share-market moves on any one day.  And mostly fail.

Short-term moves in share-markets occur because of emotion, not because the actual value of a company changes.

And one of the more commentated upon 'drivers' of the US stock-markets over the past nine months or so has been the price of oil.

So the price of oil goes up, the S&P 500 (the major measure of the us stock market, not the 'Dow') goes up.  (And then Woolworths goes up, because the ASX goes up.)  Weird, isn't it?

It's weird because the price of oil is more a cost to industry than a benefit to resource companies.  Therefore an increase in the price of oil should push share prices down.  In theory.

Well, in the interests of science, W&D has done some research.  And come up with the following chart...

 

Oil SP500 3W&D would like to say that a relationship is clear.  Well it is: y = 0.164x + 0.0002, with an R-squared of 0.215.

Got that?

An easier statistic is that since 30-Jun-15, on 66% of trading days for both Brent Crude and the S&P 500, the price movements of both were in the same direction.  That is both up, or both down.

Does that mean anything?

Well, to be honest, no.  A 66% same-direction outcome is not meaningful.  And an R-squared of 0.215 is also not meaningful.

It just means that in the absence of compelling individual company data, the media folk will pin the blame for a move on anything that is plausible at the time. 

And over the same period, the S&P 500 is up 2%.  The price of oil is down 21%.

But let W&D give you the whisper.  If on the first Wednesday after the first Tuesday after the first Monday in November, the S&P 500 falls massively, W&D will bet London to a brick that its because Donald Trump was elected president on the previous day.  

That will certainly be a case of "Post hoc ergo propter hoc."

*W&D favourite champagne.  And readers will know, of course, that, having two dots on the "e", the next letter "t " should be pronounced.   One has to say "perrier zhou-ette".  

By the same token the Moët in Moët & Chandon is pronounced "mo-ette".  Not mo-ay, as some coodabeens would have it.