Oil Shock: What History Says About the Stock Market and Rising Energy Prices

We’re now three weeks into the war in Iran, and the signs for the global economy continue to look worse.

In the last few days, Israel and Iran have traded on key energy infrastructure, causing another spike in oil and natural gas prices. As of March 20, Brent crude oil, the global benchmark, was trading around $105 a barrel, up 50% from where it was before the war broke out.

It’s unclear how long oil prices will remain elevated. That depends on whether the Strait of Hormuz reopens and what lasting damage there is to energy infrastructure in the Gulf region. Stocks have already started to pull back in response to the war. The S&P 500 (^GSPC 1.51%) is down 5% so far this month, and just finished its fourth straight losing week, and the Nasdaq Composite is approaching correction territory, defined as a pullback of 10% or more.

This isn’t the first time that oil prices have spiked rapidly in modern history, and it makes sense for investors to consider what the typical impact is. Let’s take a look at what’s happened to the stock market when oil prices have soared at other times.

Why a bear market could be coming

Since the oil crisis of 1973, there have been seven periods when oil has spiked 40% or more.

Those include:

• The 1973 oil crisis, driven by the Arab oil embargo in response to the Yom Kippur War
• The 1979 oil crisis caused by the Iranian Revolution
• A brief spike in 1990 after Iraq invaded Kuwait
• 1999-2000 from OPEC production cuts
• A surge in 2007-2008, driven by speculation ahead of the global financial crisis
• In 2010-2011 due to the Arab Spring
• 2020-2022, post-Covid surge as the global economy reopened.

In all of those periods, the S&P 500 sank into a bear market, except during 1979 and 2011 when it approached a bear market.

The causality between the oil shocks and the bear market isn’t always clear, but in some cases it is. Stocks fell more than 40% in the 1973-1974 bear market, with the oil embargo cited as a major cause and contributing to a surge in inflation.

In 1979, stocks continued to rise with the exception of a brief pullback in early 1980.

In 1990, the S&P 500 pulled back as oil prices spiked on Iraq’s invasion of Kuwait, falling about 20%.

In 1999-2000, there was a rebound in oil prices, with Brent crude more than tripling and stocks plunged in 2000, though that was attributed to the bursting of the dot-com bubble.

Finally, oil spiked in a commodity surge in 2007-2008, peaking before the stock market crashed, and rising oil prices were part of the inflation and cost-of-living crisis that caused a bear market in 2022.

What means for investors

A short period of high oil prices on its own isn’t enough to cause a bear market or a recession, but it can definitely be a contributing factor. A sustained period is much more likely to send the economy spiraling, and there were signs of fatigue in the bull market before the war in Iran broke out.

Job growth has been anemic over the last year, with just around 200,000 jobs added, a number that a strong economy can add in a month. Inflation remains stubborn. Credit card and household debt have jumped since the pandemic, and consumer sentiment has been in the dumps for the last year. The S&P 500 has also been trading at a historically expensive level, making a pullback that could lead to a correction or a bear market more likely.

Overall, the longer the war continues, or at least the longer the pressure on energy prices remains, the more likely it is that a bear market will happen. Higher oil prices are likely to lead to higher prices for consumers at a time when they’re already jittery over stubborn inflation over the last few years and a weak job market.

The good news for investors is that the S&P 500 has overcome past oil crises and continued to deliver strong long-term results.