What kind of effect does a runup in oil prices have on the stock market? Recent research shows that it could have a positive impact on your portfolio. For one thing, oil prices tend to signal an inflationary trend, and while inflation may make some things more difficult, stocks tend to rise along with that inflation figure. Rising oil prices can also be a sign of a strong economy, which is also good for stocks.
Nadeem Walayat, writing for the Market Oracle site, has demonstrated that the graph of the price of a barrel of oil and the trendline of the Dow Jones industrial average have moved in the same direction more often than not over the past decade. Especially since the financial meltdown in 2008, the two have tended to be highly correlated with each other.
The one prominent exception to that relationship is an oil shock. A sudden spike in oil prices is likely to curb demand for energy from all corners of the economy, and create a slowdown in economic activity. There is a huge difference in economic effects between an orderly movement in crude oil prices and a sudden shock. The current upswing in oil prices has not – at least not yet – risen to the level of an oil shock.
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