Crude oil is now influenced more by the stock market than by its own inventory levels or demand patterns. Lately, that lockstep has reached an extreme, with the correlation between crude oil and the Standard & Poor’s 500-stock Index hovering around 70%, doubling the average of 34% since 2008.
Oil and stocks aren’t supposed to swing in sync with each other. Unlike stocks, which are priced off corporate earnings, oil is usually driven by supply-and-demand dynamics.
Last week, this high correlation was a double-whammy for investors who owned both oil and stocks. A 4% selloff in stocks was compounded by a 7% loss in oil prices.
As reported by an Wall Street Joural article,
The typical low correlation causes many investors to include commodities into their portfolios of stocks and bonds to diversify and smooth out swings in their other investments.
It seems investors have to reconsider this strategy now for the portfolio construction
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