Here's How Stocks React When the Price of Oil Spikes

The market has turned down since the beginning of the war in the Middle East. And that drop accelerated in recent trading days due to a spike in the oil price. As I write this on Monday morning, March 9, the price of Brent crude, the international benchmark, is about $104 per barrel. That's about $33 higher, or 47% higher, than the price the day before the conflict began.

Image source: Getty Images.

That's brought panic to the stock market. The Chicago Board Options Exchange Volatility Index -- or VIX, also known as the stock market's fear gauge -- climbed to as much as 31, the highest level in about 11 months and 12 points higher than the day before the U.S. and Israel launched the first salvos against Iran.

And the S&P 500 index was down over 3% after the the war began on investor concerns that the spike in the price of oil could both slow global economic growth -- perhaps even pushing the global economy into recession -- and push inflation higher. That's because energy costs are a primary expense for most households, while crude oil is used to make myriad other products, from plastics to fertilizer. Slowing growth and higher inflation equals stagflation -- never good for the stock market.

Stocks outperform in years of rising oil prices

But investors might be surprised at how the market performs during longer periods of rising oil prices. Ritholtz Wealth Management compared the market's performance in years when the price of oil rose against how it did in years of falling prices.

Intriguingly, since 1986, the S&P 500 index returned an average of 13.1% in years when the price of oil was rising versus 11.1% in years when oil was falling. One reason for that is that a rising oil price often signals more oil use in a growing global economy -- more factory usage, more flights and commerce, and more energy use overall.

In addition, when the price of oil rises 5% two days in a row, as it did last week, most of the time stocks were higher one month, three months, six months, and 12 months later.

To be sure, the current spike in oil prices is not about economic growth, it's about fears of an oil shortage, as shipping through the Strait of Hormuz -- through which moves some 20% of global petroleum -- has come to a standstill, while the war seems to be expanding.

But investors with more than a few years to retirement need to remember that despite occasional market pullbacks and corrections, there is a consistent pattern: Stocks eventually recover and move to new highs. Unless you need to cash in your investments in the next year or two, holding your positions in fundamentally sound, well-run companies is the best course of action.