U.S. stocks and oil can sometimes move together, but a period of decline for oil a decade ago indicates the potential for a sharp stock market decline that could begin this summer, according to Tom McClellan, editor of The McClellan Market Report .
In what he called an “entertaining indicative report,” McClellan wrote in a note Thursday that price movements in crude oil CL.1,
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“they tend to show up again as stock price movements about 10 years later.”
He admits he doesn’t have a good explanation for why this relationship works, but he believes it has worked for the most part since the Dow Jones Industrial Average DJIA was first created in 1896. “At some point, when there there is so much evidence, you can let go of the search for the “why” and accept the “is,” McClellan said.
Crude oil price movements have manifested themselves as stock price movements 10 years later, says Tom McClellan, editor of The McClellan Market Report.
McClellan Financial Publications
McClellan’s chart shows a sharp decline in oil prices between June 2014 and January 2016.
The US fracking boom was underway in 2014, boosting oil production, and to keep prices high in the face of that new supply, the Organization of the Petroleum Exporting Countries was trying to cut production, then abandoning the fight in the summer of 2014,” McClellan said. Oil prices then fell until January 2016.
If the 10-year lag relationship between oil and the stock market continues to work, “as it has worked for more than a century,” it would mean a sharp decline for the stock market between June 2024 and January 2026 – the magnitude of which is unknown, he said.
Stock prices in 2018 echoed the big oil price crash of 10 years earlier, which was part of the collapse of the broad commodity bubble in 2008, but it was a much quieter move lower in stocks during 2018, McClellan said.
The great bear market of 1929 to 1932, meanwhile, unfolded “on schedule” and echoed the collapse of the Texas oil boom that began to unfold in 1920, but the stock market crashed much harder than oil had suggested , he said.
So if someone plans to take advantage of this “fun indicative relationship” between oil and the stock market, they will need to keep a few things in mind, McClellan said.
The 10-year lag is not always exactly 10.0 years, he said. “Sometimes actual stock market turns vary by a few months from the ideal lag.”
The magnitude of crude oil’s movements, meanwhile, is not necessarily echoed in the stock market, McClellan said. “This model is more about the timing of the turns than their severity.”
Also, sometimes, “an exogenous event can come along and shake things up,” he said.
The “Covid Crash” of March 2020 is not something crude oil seems to have known was coming, but after that event, the major stock market averages “worked very hard to get back on track,” he said. And in the 1990-1991 period, when oil prices briefly doubled after Iraq’s attack on Kuwait, only to collapse back to their previous price levels, stocks did not echo that “abnormal peak.”
Nonetheless, based on the leading indication model, McClellan said he is confident in his expectations that the period between June 2024 and January 2026 “will not be a great time for the stock market, and also not a great time for whoever wins November 2024”. elections.”
On the same basis, he said he looked forward to the “big bull market that this model predicts will come between 2026 and 2028.”
So far this year, U.S. benchmark West Texas Intermediate crude has remained in a tight trading range, with a difference of less than $10 a barrel between price highs and lows, which could make for a quieter trading period for the national stock market. about 10 years from now.