The Economy Just Shed 92,000 Jobs as Oil Prices Surge and Inflation Creeps Up. History Says the Stock Market Will Do This Next.

Since the 1970s, major oil shocks – sudden, drastic increases in oil prices driven by geopolitical supply disruptions – have struck five times. Each time, a bear market followed.

Now, with the war in Iran, oil shock No. 6 is taking shape, and it’s arriving at a moment when the economy is already showing signs of stagflation – a particularly tricky economic situation in which inflation rises and growth stalls at the same time.

The latest jobs report showed the U.S. lost 92,000 jobs in February. And on Friday, gross domestic product (GDP) growth from last quarter was just revised down from the initial 1.4% estimate to just 0.7%. At the same time, core personal consumption expenditures – the Federal Reserve’s preferred inflation gauge – rose 3.1%, well above the Fed’s target. While these numbers aren’t dire, it’s not a pretty picture – and it’s not exactly the time when you want to throw an oil shock into the mix.

Image source: Getty Images.

Five shocks, five bear markets

Every major oil shock since 1970 – the oil embargo of 1973, the Iranian Revolution of 1979, the start of the Gulf War in 1990, the financial crisis in 2008, and Russia’s invasion of Ukraine in 2022 – has produced a bear market in the S&P 500 (^GSPC +0.25%) or made one worse. Not all oil shocks are created equal, however.

While still painful, in relative terms, 1990 and 2022 were short-lived. Both times, the bear market that followed the oil shock lasted less than a year.

1973 and 1979 were different. The combination of oil shocks, a struggling economy, and rampant inflation led to a whole decade of subpar returns for investors. That’s perhaps putting it lightly.

The S&P 500 returned just 17% over the entire 10-year period. Mind you, inflation in 1979 alone would have eaten more than 75% of those gains in real (inflation-adjusted) terms. The market finally found its footing in the early '80s after historic Federal Reserve rate hikes and back-to-back recessions.

2008 is the outlier of the bunch because the oil shock itself wasn’t a primary driver of the financial crisis and the bear market that followed; that was well underway by the time oil peaked. Still, the climb to nearly $150 a barrel and the implosion that followed made the bear market worse.

What today’s stagflation signs could mean for investors

While there’s no perfect analogue from the five, there are echoes of each.

The good news is that today’s inflation numbers are much tamer than some of the worst examples. In 2022, the world was still reeling from the pandemic, and inflation rose to a point roughly 3 times what it is today. And though the job market is showing major signs of stress, the 92,000 jobs lost are a far cry from 2008’s 700,000 a month.

The bad news is that the economy is facing both at the same time – a rare dynamic – much like the crises of the 1970s. We’re seeing the early signs of stagflation take shape – and that was before oil spiked. While again, the numbers today aren’t as bad as they were in 1973 or 1979, it’s still a concerning picture. And Wall Street strategist Ed Yardeni now puts the probability of the U.S. entering a period of proper stagflation at 35%, up from a 20% chance before the Iran war began.

Expand

SNPINDEX: ^GSPC

S&P 500 Index

Today’s Change

(0.25%) $16.71

Current Price

$6716.09

Key Data Points

Day’s Range

$6710.80 - $6754.30

52wk Range

$4835.04 - $7002.28

Volume

2.9B

What history says happens next

History would certainly suggest the stock market will fall further from here.

But by how much and for how long are different questions – and they depend a lot on how long traffic through the Strait of Hormuz is disrupted and how long oil prices stay elevated. While some progress has been made in recent days, oil prices have retreated somewhat from their recent peak; there’s plenty of reason to believe this will last much longer than many hope.

The International Energy Agency coordinated its largest emergency stockpile release in history – double what it released in 2022 – and the oil market mostly brushed it off. Prices have actually risen since the announcement.

If prices stay elevated, the twin forces of stagflation could take hold, and history says the next few years won’t look pretty for the stock market.

But history also says that, regardless, long-term investing wins. Every one of these past bear markets eventually ended. Investors who stayed patient and kept a long-term view came out the other side. Even the “lost decade” of the 1970s was followed by a nearly 20-year bull market that saw the S&P 500 return nearly 17% per year – 20% if you include dividends.

This is a great time to make sure you’re invested in companies you believe in for the long term – preferably ones that aren’t chasing hypergrowth with massive debt or companies with market capitalizations in the billions despite annual revenues in the low millions_._