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The Energy Effect

Since the oil market share war began in the summer of 2014, oil’s decline has affected multiple asset classes. The S&P GSCI Crude Oil (TR) lost over 80% from June 20, 2014, until its bottom on Feb. 11, 2016. Although the prices are still generally considered low, crude oil has rebounded about 50% on a total return basis. Additionally, volatility has calmed and the correlation between oil and stocks is starting to fall.

However, even as the oil industry starts to recover, more questions remain from the Brexit vote, the upcoming U.S. presidential election, and lingering volatility in the Chinese stock market. Other economic factors, like the strength of the U.S. dollar, interest rates, and infl ation, are now joined by oil as major drivers of markets around the world.

Though the correlation between oil and other asset classes is generally low, there are varying degrees of correlation and even a few surprises. For example, Canadian equities are more correlated with oil than are the emerging markets and U.S. equities; Australian equities are barely correlated with oil; and China, which is not nearly as big a producer as a consumer, has equities that are moderately correlated with oil. Oil is not as oppositely correlated to gold as many think; they have a relatively weak positive correlation of 0.32. While gold straddles the line between a low-to-moderate positively correlated relationship with oil, a few other assets have shown more diversifi cation historically. Real estate and bonds show little relationship with oil, with correlations of 0.18 (REITs) and 0.07 (the S&P CoreLogic Case-Shiller Home Price Index), but VIX® is the one asset with an even moderately negative correlation with oil, at -0.32. The correlation has increased across commodities and other asset classes, so picking winning asset classes may be more challenging today than before the oil crash.

What follows is a series of pieces that explore the impact oil has on specific asset classes to help explain the sensitivities unique to each.