The rise in oil is good for the market

The war with Iran marked a turning point in market performance. The rise in the price of oil and energy in general raised inflation expectations and weakened growth projections amid geopolitical uncertainty, leading stock markets to a decline of more than 10% in most regions.

The channel of action is quite intuitive: a higher crude price implies higher costs (on average), which eventually hits economic activity. But does the market follow this relationship?

When analyzing the correlation over the last 40 years between the price of oil and the performance of the U.S. stock market, we see that, on average, when crude rises the market has better returns (13.1%) than when this commodity is in a downward cycle (11.3%). What's more, when reviewing the impact on the S&P 500's return after 2 days of gains greater than 5% in oil historically, we see gains of more than 20% over 12 months, on average.

Evidently these data must be analyzed with caution. A sustained rise in the price of oil could generate disruptive effects at the economic and financial level with negative consequences for risk assets. That said, transitory rises don't necessarily have a relevant impact on the market and could even be considered opportunities for long-term investors.

No one is certain how long the war in Iran will last, but it's important to remember that the market is one step ahead and there is no better investment strategy than discipline, especially in these moments of uncertainty.

Column written by José Ignacio Villarroel for Diario La Segunda