My how things have changed. Back in the 1980s, 1990s and the early part of this century, gasoline prices and stock prices moved in opposite directions. When gas prices went down, stock prices went up. When gas prices went up, stocks went down. But that is no longer the case.
Since 2008, however, the national average price of gasoline and the S&P 500 (SPX) have had a tendency to move in the same direction, with an extraordinarily correlation of 0.86.
But correlation doesnâ€™t tell the whole story. What has happened is that energy pricesâ€”in particular crude oilâ€”has had a tendency to oscillate around a central price region. When gas prices drop, the consumer gets happy. They start spending, the economy starts to heat up. Stock prices rise.Â And gas prices rise, creeping up to the $4.00 range. Consumers get unhappy with the high price of gasoline. They retrench and stop spending. The economy slows down. Gas prices and stock prices fall. This has happened repeatedly the past couple of years.
We put together a couple of graphs to illustrate key turning points. The blue line is the national average retail price of gasoline. The red line is the S&P 500.
Notice that every time the price of gasoline reached $4, the stock market started to roll over and fall.Â The smallest market decline from peak to trough was this year when the S&P 500 fell nearly 10%.
This next chart shows the percent changes in the same chart so that it is easier to visualize the peaks and troughs.
These are the two data series that had the 0.85 correlation.
Bottom line, if you think stocks are headed higher, donâ€™t be surprised if you also see a big rise in gas prices.Â And if that rise takes gas prices above $4, watch out. If the past is any indication, the consumer will once again retrench, causing stock prices to drop and the economy to slow down.