The causes and effects of commodity price changes were among the topics meticulously examined at the recent “New Directions in Commodities Research” international symposium convened by the J.P. Morgan Center for Commodities at the University of Colorado Denver Business School.
The lesson of one break out session was that changes in oil prices are not immediately reflected in stock prices.
“We are the first to show that,” said Jordan Moore, an assistant professor at Rowan University in Glassboro, New Jersey, who conducted his research with a financial economist at the Richmond Federal Reserve Bank, Mihail Velikov.
To demonstrate the delayed impact to the audience, Moore presented data from the first quarter of 2015, when the price of crude sank more than 10% for two companies that are highly sensitive to the price of oil, cargo airline Atlas Air Worldwide Holdings and Murphy Oil, an exploration and production outfit. When the airline announced quarterly earnings in late April, its stock jumped, while the shares of the producer slid after its earnings announcement.
This pattern, observed in 40 years of data on many stocks, led the researchers to conclude that even though information about oil price changes is widely disseminated, investors don’t immediately account for the impact on corporate earnings. Most of the stock price movement that results from an oil price-related earnings surprise occurs early in the earnings announcement season and in the month, if not the week, that a company announces, Moore said.
That might be useful to know if the price of oil were to suddenly spike, a hypothetical situation that was the focus of a small post-conference session.
Studying oil price shocks since World War II, James Hamilton, an econometrician and professor at the University of California at San Diego, found that when oil skyrockets, the economy often stumbles not long thereafter, and he attributed part of the dip in U.S. gross domestic product during the Financial Crisis to the oil price surge that occurred between mid-2007 and mid-2008.
Hamilton discovered that the auto sector in particular suffers. Within months of an oil-price shock, consumers stop buying fuel-inefficient vehicles such as U.S.-manufactured light trucks and sport utility vehicles. Their sales dropped 26% when the price of oil soared in ’07-‘08.
When asked whether his research suggests that Ford’s new focus on the market for light trucks and SUVs opens it to significant exposure to an oil-price shock, Hamilton replied, “Yes, exactly.”
In his keynote address, Harvard Professor Jeffrey Frankel acknowledged that price movements of different commodities are sometimes unrelated – for example, tariffs might affect soybeans but not silver. Nevertheless, he said, there is a correlation between commodities because of macroeconomic forces at play.