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Could Oil’s Rise put a Halt to the Current Bull Market?

Recent turbulence in middle-east countries, such as Tunisia, Egypt and Libya, has affected both oil markets and stock markets worldwide due to the well-recognized role of Oil as the lubricant of the global economic machine.  We, at Hennion & Walsh, have even observed a growing negative correlation between the price of oil and the performance of the stock market.  In fact, according to the Bespoke Investment Group, Oil has now risen 20% + over the last two weeks which suggests, from a historical perspective, that the Spring of 2011 could be a difficult period for the stock market.  Consider that since 1983, there have been six instances where the price of oil has risen by 20% or more over a two week period.    Interestingly, the average return of the stock market, measured by the S&P 500 index*, over the next one and three month periods following these oil price increases has been -2.25% and -4.13% respectively.

Two Week 20%+ Rallies in Oil (1983-2011)         S&P 500 % Performance

Two Weeks Ending

Two Week Change %

Next Month

Next Three Months

5/2/1986

23.6%

2.05%

-3.08%

8/8/1986

36.1%

4.27%

2.31%

8/3/1990

24.9%

-10.80%

-13.76%

9/2/1990

24.4%

-3.83%

3.75%

7/3/1998

22.5%

1.82%

-8.91%

1/2/2009

36.8%

-6.98%

-5.11%

3/4/2011

21.7%

TBD

TBD

Average

-2.25%

-4.13%

 

Source: Bespoke Investment Group, B.I.G. Tips Report, March 4, 2011

We are not suggesting that this particular set of trend data will automatically result in a decline in the stock market over the next month or three months as there are many factors that can contribute to stock market performance.  However, given the dramatic rise in the stock market since the bottom of the most recent bear market was reached on March 9, 2009 and the concern that sustained, high oil prices could slow down economic recovery efforts, a pullback in the equity markets in the upcoming months is not inconceivable.

We believe that this situation just another example of the importance of having a sound and robust asset allocation strategy in place within a diversified investment portfolio, incorporating a wide range of asset classes and sectors, given these uncertain, and often volatile, global markets.

* The S&P 500 Index, a widely used measure of large U.S. stock market performance, is a market capitalization-weighted index of 500 leading companies in leading industries of the U.S. economy. You cannot invest directly in this index.