Are Emerging Markets Really More Correlated With Crude Oil Than the S&P 500?

Crude oil continues to dominate the headlines this year. After being down nearly 40% for two consecutive years, and a horrible start to this year, crude has rallied back and is now green for 2016. As we mentioned in mid-February, crude was historically oversold, making the recent strength not a total surprise. At the same time, the correlation between the S&P 500 and crude oil is near an all-time high.

Today, we are going to take another look at the correlation between crude oil and the S&P 500, but also examine crude oil and emerging markets. Historically, emerging markets have been more correlated with crude oil. In fact, conventional wisdom says crude oil and emerging markets are more joined at the hip than the S&P 500 and crude oil.

To examine this, we looked at the 22-day correlation between crude oil and the MSCI Emerging Markets Index going back to 2005. There has been a 28.4% correlation versus crude oil, while the correlation of the S&P 500 and crude oil is 26.5%.

Where things get very interesting, however, is that since the financial crisis, the S&P 500 and crude oil have actually been more correlated than emerging markets and crude oil. This runs counter with what most people probably realize. So far this year, the S&P 500 and crude oil have been 56.2% correlated versus 33.2% for emerging markets and crude oil. Going back to 2009, the S&P 500 and crude oil have been  41.8% correlated, verus 32.5% for emerging markets and crude oil.

In conclusion, the majority think emerging markets and crude oil are more correlated than the S&P 500 and crude oil. This simply hasn’t been true the past few years. As things change over time, shifts in patterns and correlations such as these may continue.

Source: LPL Research, Bloomberg 3/17/16


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