Energy stocks account for roughly 8 percent of the S&P 500’s value and, with the exception of a few subsectors, these names usually suffer when oil and gas prices drop.
But the remaining 92 percent of stocks in the S&P 500 benefit from lower oil and gasoline prices, which reduce consumer and businesses’ costs and pad their bottom lines.
Early signs suggest that the wealth effect associated with lower oil prices has already helped to boost consumer spending; for example, US retail sales jumped by 0.7 percent in November, their largest gain in eight months.
However, as we explained in Consumption Junction and Will Retailers Rally Because of Lower Oil Prices?, the reality of which stocks stand to benefit the most from lower energy prices is much more nuanced than the conventional wisdom would suggest.
Based on data from 1990 to the present, the S&P 500 has a positive correlation of 0.153 to West Texas Intermediate (WTI), meaning that the index and crude-oil prices tend to move in the same direction.
Oil prices and stocks are positively correlated because conditions that support higher crude-oil prices—strong global economic growth and demand for oil—are also upside catalysts for equities.
Consider that the S&P 500 rallied by almost 100 percent between October 2002 and October 2007, despite a tripling in crude-oil prices. Likewise, the benchmark stock index has climbed by almost 180 percent since March 2009, overcoming WTI prices that more than doubled.
Conversely, when WTI plunged from more than $145 per barrel in July 2008 to about $33 per barrel in December, the credit crunch and financial crisis fueled a 75 percent decline in the S&P 500.
Even retailers and the consumer-discretionary sector—groups that would seem to benefit from the additional cash in consumers’ pockets—exhibit a weak correlation to movements in crude-oil prices.
Only a handful of stocks and sectors receive enough of a tailwind from lower oil prices to counteract the positive relationship between oil and economic growth.
A classic hedged against lower crude-oil prices, airlines exhibit a significant negative correlation to crude oil. And our favorite, Model Portfolio holding American Airlines (NSDQ: AAL), has delivered the goods, soaring 41.6 percent since the end of the third quarter.
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In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Feb. 25, 2021
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