The Potential Link between a Previous Oil Drop and a Future Decline in the U.S. Stock Market
In a recent note, Tom McClellan, editor of The McClellan Market Report, has pointed out a potential link between a previous oil drop and a future decline in the U.S. stock market. McClellan suggests that movements in crude-oil prices tend to show up again as stock price movements about 10 years later. While he does not have an explanation for why this relationship works, he believes that it has been working for over a century.
McClellan’s analysis is based on a chart that shows a sharp fall in oil prices between June 2014 and January 2016. During this period, the boom in U.S. fracking led to increased oil production. To counter the effects of this new supply, the Organization of the Petroleum Exporting Countries (OPEC) attempted to cut output but eventually gave up in the summer of 2014. As a result, oil prices dropped significantly until January 2016.
If the 10-year lag-time relationship between oil and the stock market continues to hold, it could mean a big decline for the stock market between June 2024 and January 2026. However, McClellan emphasizes that the magnitude of this decline is unknown. He also notes that while stock prices in 2018 mirrored the big oil-price crash from 10 years earlier, the decline was much quieter. Similarly, the bear market of 1929 to 1932 unfolded on schedule but fell much harder than oil had suggested.
Despite these variations, McClellan believes that the relationship between oil and the stock market can still provide valuable insights if certain factors are considered. Firstly, the 10-year lag is not always precisely 10 years, and the actual turns in the stock market may vary by a few months. Secondly, the magnitudes of crude oil’s movements do not necessarily correspond to the severity of stock market movements. The model is more focused on the timing of the turns. Finally, exogenous events can disrupt the relationship between oil and the stock market, as seen during the March 2020 “Covid Crash.”
Based on this leading indication model, McClellan expects that the period between June 2024 and January 2026 will not be favorable for the stock market. He also predicts that whoever wins the November 2024 elections will face challenges during this time. However, he anticipates a “big bull market” between 2026 and 2028.
For now, U.S. benchmark West Texas Intermediate crude oil prices have remained within a tight trading range this year. With minimal fluctuations, it is possible that the domestic stock market will experience a quieter trading period roughly 10 years from now.
While McClellan’s analysis provides an interesting perspective on the potential link between oil and the stock market, it is important to consider other factors that influence market movements. Investors should exercise caution and not rely solely on this relationship when making investment decisions.
