With U.S. oil prices topping $100 a barrel on Monday, many investors are starting to worry about the impact of rising energy prices on stocks, which could lead to a correction market (down 10%) or a bear market (down 20%) depending on how long the war between the U.S. and Iran lasts. In a note Monday, CFRA Research outlined what investors should expect if oil pushes stock prices further lower. Since the Great Depression, the S&P 500 has experienced 18 bear markets. Sam Stovall, chief investment strategist at CFRA, said three of those were due to the oil crisis. The S&P decline caused by the oil crisis lasted 13 months on average, leading to a decline of just under 30%. The average has been most affected by the severity of the bear market that began in 1973, when OPEC imposed an embargo on all countries that supported Israel in the Yom Kippur War. Oil prices quadrupled and the economy fell into recession. The bear market movements in 1956 and 1990 were smaller. Stovall noted that some people don’t even consider a true bear market because the events of 1990 fell short of the technical 20% definition used by investors. In 1956, the Suez Canal Crisis, when Egypt seized control of the waterway from a British and French-owned company, caused major disruption to the oil supply chain. A recession ensued in 1957, but it is not clear whether the oil shock triggered the economic contraction. The shock of 1990, caused by Iraq’s invasion of Kuwait, doubled oil prices and contributed to the recession of the early 1990s. CFRA does not include the 1979 oil crisis triggered by the Iranian revolution. The oil crisis caused crude oil prices to more than double, but it was in the middle of a lost decade for stock prices that lasted until 1982. Consumer tightness If crude oil prices continue to rise, consumers may become tight, leading to a decline in non-essential spending. Rising energy prices could also lead to higher inflation, which could lead to higher interest rates, dampening demand for loans and making borrowing more expensive. Western Texas Intermediate crude oil futures have risen more than 50% since the war between the United States and Iran began. But as of Friday’s close, the S&P 500 was down more than 2%. The 10-year Treasury yield rose by about a quarter of a point to its all-time high. Regardless of what history points to future performance, Stovall noted that he is uncertain about the path forward. “No one knows whether the current crisis will cause a new ‘garden variety’ bear market (-20% to -39.9%) or another crash,” he said. @CL.1 5D Mountain West Texas Intermediate for the last 5 days.
