The Markets are wildly volatile, with extreme daily switchbacks; however, I still find the underlying data to be relatively stable. One of the metrics I like to watch is Oil’s ratio to other asset classes. For example, Oil’s relationship to the S&P 500. (see below chart)
The chart tracks the price of the S&P 500 in barrels of WTI Oil (rather than US Dollars) over the past 20 years. The nominal value of the ratio is less important than the trend line. From the DotCom Bubble to the Housing Bubble, the trend gradually moved lower from the mid 40s to 20, with an average of about 28. During the recover period that followed the Great Recession, the ratio was very stable and tacked along at a rate of about 16. Since the Commodities Crash of 2015-16, the ratio has been much more volatile, but with the exception of the Pandemic, the trend has been reliably range bound between 30-60.
While the headlines shriek panic of Oil hyperinflation, the current ratio is just under 40, only slightly more than the 20 year average. From an equity’s perspective, Oil is within trend, and no more nor less expense.
I’ll continue to monitor the situation, but for now, I remain cynically optimistic.
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