How can I use this information?
Don't assume that oil will continue to rise or even that current high prices will hold. We have
experienced an eight fold increase in eight years. From 1973 to 1980 investors endured a ten fold increase in oil
prices over a seven year period. Then oil declined 72% from 1980 to 1986. Did rising demand for oil cause oil
prices to skyrocket ten fold from 1973 through 1980? Did falling demand for oil then cause oil prices to plummet
72%? Absolutely not! Oil price trends are not the result of supply and demand in a free market. Oil production is
manipulated by governments for political and economic ends. Accordingly, the forecasting of oil prices is all but
impossible by anyone except heads of state.
Expect rising oil prices to exert a negative influence on the stock market. However, remember that oil is
just one of many forces that influence the stock market. Housing, interest rates, demographics, politics,
immigration and trade also have a significant impact on the market. Some forces are positive while others are
negative. It's the direction of the sum of the diverse forces that determine the market's fate.
SignalTrend's unemotional computer timing system is currently bullish, but it may change its buy / sell
signal in the near future. If that happens, SignalTrend will notify you by email. Remember, SignalTrend's
stock market timing system was backtested 100 years with excellent results!
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||This issue of Investment Tips
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● Sharply rising oil prices reduce stock returns by about 1/3.
● Sharply falling oil prices increase stock returns by about 1/3.
Oil rose from $4 to $40 from 1973 to 1980 (ten fold increase in seven years). Then oil prices collapsed to $11 in
1986 (72% decline in six years). Oil then traded near $20 from 1987 through 1997 and then collapsed again to
$11 in 1999. Since 1999, oil has risen to $86 per barrel in October of 2007 (eight fold increase). During the last
12 months, oil has risen 46%.
The stock market can either rise or fall as oil prices rise. During 1973-1974 oil prices rose 213% and the S&P
500 declined 42%. During 2003 - 2006 oil prices rose 110%. However, the S&P 500 rose 61% over the same
period. While rising oil prices haven't always produced severe stock market declines, they have reduced returns
significantly. The U. S. imports a much larger portion of its oil now than it did in the 70's. So, increases in the price
of oil send more money out of the U. S. and out of the U. S. economy.
|How Much does the Price of Oil Affect Stocks?
Proprietary Graphs, Tables and Analyses - All Rights Reserved
Stock Performance AFTER severe oil price changes:
From 1973 through 2007, when oil prices rose more than 20% over a 12 month period, the S&P 500 gained
6.7% (avg.) during the subsequent 12 month period. However, when oil prices fell more than 20% over a 12
month period, the S&P 500 gained 13.0% over the subsequent 12 month period. When oil price changes over a
12 month period were moderate, the S&P 500 averaged a 9.9% gain over the following 12 months. For the
purposes of this issue of Investment Tips, oil price increases or decreases of more than 20% over a 12 month
period are considered severe. All other 12 month price changes are categorized as moderate.
Stock Performance CONCURRENT WITH severe oil price changes:
When oil prices rose more than 20% over a 12 month period, the S&P 500 gained 6.8% (avg.) during that period.
But, when oil prices fell more than 20% over a 12 month period, the S&P 500 gained 14.3% during that period.
When oil price changes over a twelve month period were moderate, the S&P 500 gained 9.5%.
|Link to Previous Issue of Investment Tips
|After Moderate Oil Price Changes
|(1973 - 2007, without dividends)
|After Severe Oil Price Decreases
|After Severe Oil Price Increases
The relationship between oil prices and the S&P 500 was analyzed for the period 1973 - 2007. West Texas
intermediate grade oil was used for all oil price calculations. The stock market's performance has been greater
both during and after oil price declines. Stock returns were lower during and after oil price increases.