The S&P 500 / Oil Ratio

Comparing two important series

If you take the S&P 500 and divide it by the price of oil you see a pretty interesting relationship:

Now, given that these two time series have a good amount of volatility and are not perfectly correlated, it’s natural that we see some periods of deviation from the long-term average.

The two most obvious spikes come from the COVID episode and the dot-com bubble, whereby the ratio indicated that either the S&P was relatively high or the price of oil was relatively low.

Right now, the ratio is above the long-term average. That means that either the market needs to come down more or the price of oil needs to rise to get the ratio back to the long-term average.

At least, that’s what it means in theory. History shows us that the ratio can be removed from the long-term average for a long time. After all, it’s just a ratio, not some law of the universe. Consider it a guidepost among the many that are out there!