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Decoding Oil-Stock Correlation


According to Tom McClellan, editor of The McClellan Market Report, a historical relationship between U.S. stocks and oil prices suggests a potential steep decline in the stock market this summer.

Understanding the Relationship

McClellan describes an intriguing pattern where movements in crude-oil prices tend to mirror stock price movements roughly a decade later. While he does not have a concrete explanation for why this correlation exists, he notes that the relationship has held true since the creation of the Dow Jones Industrial Average in 1896.

Past Trends

A notable example provided by McClellan is the sharp fall in oil prices from June 2014 to January 2016. This period coincided with a surge in U.S. fracking activities, leading to increased oil production. Despite efforts by OPEC to curb output, oil prices plummeted during this timeframe.

Future Projections

If this 10-year lag continues to influence market trends, McClellan suggests that we might witness a significant stock market decline between June 2024 and January 2026. While the exact impact remains uncertain, historical data supports the validity of this peculiar relationship.

Parallel Instances

Drawing parallels to previous scenarios, McClellan highlights how the oil-price crash of 2008 foreshadowed a quieter downturn in stock prices during 2018. Similarly, the bear market of 1929-1932 correlated with the collapse of the Texas oil boom in the 1920s, though the stock market experienced a more severe decline than anticipated.

In conclusion, as investors navigate the intricacies of market fluctuations, keeping an eye on oil prices could offer valuable insights into future stock market movements.

The Relationship Between Oil and Stock Market

According to McClellan, understanding the correlation between oil and the stock market is crucial for investors. However, there are some key factors to consider when analyzing this relationship.

Timing Discrepancies

While the typical lag time between oil movements and stock market shifts is around 10 years, McClellan points out that this timeframe can vary by a few months. This means that the stock market’s actual turns may not always align perfectly with the expected lag time.

Magnitude Discrepancies

McClellan also notes that the severity of crude oil’s movements may not directly translate to the stock market. The focus of this model is more on predicting the timing of turns rather than predicting the intensity of price fluctuations.

External Factors

External events, such as the “Covid Crash” in March 2020, can disrupt the expected relationship between oil and the stock market. While oil prices may not always anticipate such events, the stock market can work hard to recover following significant disruptions.

Future Projections

Based on his leading indication model, McClellan anticipates a challenging period for the stock market between June 2024 and January 2026. Conversely, he predicts a bullish market trend between 2026 and 2028.

Current Market Trends

As of now, U.S. benchmark crude oil prices have remained relatively stable, with minimal fluctuations. This could suggest a period of calm trading for the domestic stock market in approximately a decade.

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