'The Godfather' Insight on What's Driving Markets

Oil on Troubled Water

“The Godfather” has a quote for everything. Maybe, just maybe, it was Putin all along. Or perhaps its was Nikolai Kondratiev.

Just as Vito Corleone realized too late which rival don was pulling the strings against him, it looks ever more as though the oil price has been driving markets all along. It shouldn’t be this way. The global economy is far less oil-intense than it was in the 1970s, meaning that fuel accounts for a smaller percentage of gross domestic product. An information and services-based economy shouldn’t be so dependent on burning fossil fuels. But once the oil price rises above a certain level, investors behave as though it is. And it’s hard to read the events of the last few months any other way.

This is how the S&P 500 excluding energy has performed over the last 12 months, compared to the oil price:

The peak and subsequent steady decline in the oil price appears to have been the critical development in turning the market. Looking instead at equity volatility, this screenshot shows the VIX 10-day moving average, in pink, against the yellow Brent crude price. Volatility has twice subsided once oil appears to have declined: