Expensive Oil Not a SPX Death Sentence, But Bad Enough

Oil prices popped above $100 over the weekend after the U.S. and Iran could not agree on a peace deal, leading the U.S. to implement a blockade on the Strait of Hormuz. West Texas Intermediate (WTI), the main U.S. benchmark for crude prices, is back below $100 and oil futures aren’t predicting a move back above that level.

However, the situation in the Middle East is getting dicey, and there’s history of the U.S. getting bogged down in conflicts in the region. Therefore, sustained high oil prices are in the range of possible outcomes.

It’s never a bad idea to hope for best and prepare for the worst, so that’s what I'm doing in this article. In the analysis below, I’m digging into how stocks have performed in the past when oil traded above $100 for an extended stretch.

Stocks Underperform With Oil Above $100

The first time oil reached $100 per barrel was in 2008. Since then, I compared S&P 500 Index (SPX) returns going forward based on whether oil was trading above or below that level. There’s a stark difference between the two tables below.

At every timeframe listed, from two weeks to one year, the SPX averaged a negative return when oil was above $100. With oil above the century mark, the percentage of positive returns was smaller, there was less upside (average positive), and severe downside (average negative) compared to when oil was below $100.

Look at the six-month returns specifically. When oil was above $100, the SPX averaged a return of -6.9%, with about half of the returns positive. With oil below the century mark, the index averaged a return of 7%, with almost 80% of the returns positive. In short, and not surprisingly, high oil prices are generally bad for stocks.

It's Not All Doom and Gloom, Though

The data above looks grim, but $100 oil hasn’t always led to declines. The chart below shows the SPX from 2008 through 2016, marking times oil traded above $100 per barrel. I see five stretches when oil traded above that level. The last three times, stocks moved higher.

This next chart below shows the SPX since 2021. Stocks performed poorly in 2022 with oil above $100. That oil spike was driven by the Russia-Ukraine war.

Finally, here’s another way to look at it. I found the first and last day of each year that oil traded above $100 per barrel. Before now, there were six years in which this occurred, with the last time being in 2022. The first day of that year oil reached the century mark was March 1, and the last day of that year it traded above that level was July 29. The SPX fell 4.09% over that period. In the six years, there were three times the index increased, and three times it decreased between those dates of oil above $100.

It's safe to say sustained high oil prices aren't necessarily a death sentence for stocks, but based on the first table, this has historically been a major headwind that is best avoided.