SimonConstable

FactSet

The price of Brent crude oil has diverged from the S&P 500 Index this year, notably in the past few months.

The bear market in crude oil prices should have stock investors elated, not disappointed. What’s more, there’s still time to make money.

Prices for Brent UK:LCOX4 the European benchmark, have tanked more than 20% from $115 a barrel on June 19 to less than $91 today. according to data from FactSet.

Cast off any ideas that the slump in the oil market is a reflection of slowing global growth. Apparently, that doesn’t matter.

How do I know? Last month I met with Professor Ben Jacobsen, head of financial markets at Edinburgh University Business School. He gave me a copy of a paper that he and two other economists wrote on the oil market. They based their research on close to three decades of market data. It was published in the Journal of Financial Economics in 2008 and authored by Gerben Driesprong and Benjamin Maat as well as Jacobsen.

Given that oil prices have skidded more than 20%, we should expect a 2% bump in stocks, if the relationship found in the study continues to hold true.

The big takeaway: An oil-price decline in one month “indicates a higher stock market return [the] next month,” the report says.

It gets better: The bigger the oil-price skid, the bigger the stock-market bounce should be.

The study says: “For every one standard deviation decrease in the price of oil, investors can expect a 1% annual increase in world stock market returns.”

More precisely, this means that for every 11% move in oil (one standard deviation), you should see 1% added to the equity market in the month following oil’s move. (Notably for the U.S. stock market, the relationship in returns to oil-price moves is said to be “significant at the 10% level.” That is, the probability of such a relationship being randomly generated is less than one in 10. That’s also true of many other developed markets.)

Given that oil prices have skidded more than 20%, we should expect a 2% bump in stocks, if the relationship found in the study continues to hold true.

If that doesn’t sound like a whole lot, then it’s possible you are naïve or greedy or both.

This year’s total return in the S&P 500 Index is 6.3% through Oct. 6, according to Morningstar. If that grew by 2 percentage points, the returns would be 32% higher.

You wouldn’t say no to a 32% raise, right? Well, this would be just like that: A 32% raise for your investments.

Now the bad news: Given that oil prices have been sliding for more than three months, we’ve likely had at least part of the stock bump. Remember the rally comes in the month following the oil slump.

But as oil is down more than 9% in the month through Oct. 6, if the relationship outlined above holds, then there might still be a 1% stock-market bump in the offing.

Better still, dig deeper and find sectors unrelated to the energy markets. “Predictability tends to be strong[er], however, in the non-oil-related sectors such as consumer goods, services, information technology, and financials [than in the energy sector],” the report says.