With U.S. oil topping $100 a barrel Monday, many investors are starting to worry about the impact surging energy prices will have on equities, potentially leading to a correction (down 10%) or bear market (down 20%), depending on how long the U.S.-Iran war lasts. In a note out Monday, CFRA Research outlined what investors should expect if oil pushes stocks down further. The S & P 500 has experienced 18 bear markets since the Great Depression. Three have been due to oil shocks, according to CFRA chief investment strategist Sam Stovall. On average, the S & P’s oil shock-induced decline lasted 13 months, and led to a slump of just under 30%. The average is affected most by the severity of the bear market that began in 1973, when OPEC implemented an embargo against all countries that supported Israel in the Yom Kippur War. Oil prices quadrupled, and the economy fell into recession. The moves in the 1956 and 1990 bear markets are smaller. Stovall noted that some don’t even consider the 1990 event a real bear market, as it did not reach the technical 20% definition investors use. In 1956, the Suez Canal crisis — when Egypt seized control of the waterway from a British and French-owned company — caused a major disruption in the oil supply chain. While a recession followed in 1957, it’s not clear the oil shock was a trigger for the economic contraction. The 1990 shock was caused by Iraq’s invasion of Kuwait, which led to oil prices doubling and contributed to the early 90s recession. CFRA didn’t include the 1979 oil shock, triggered by the Iranian Revolution, which caused oil prices to more than double but came in the midst of a lost decade for stocks that lasted into 1982. Consumer crunch Higher oil prices, if they persist, can crunch consumers, causing a pullback in non-essential spending. Surging energy prices can also lead to higher inflation, pushing interest rates higher and making it more expensive to borrow at the same time as it curbs loan demand. Since the U.S.-Iran war began, Western Texas Intermediate crude futures have jumped more than 50%. But the S & P 500, as of Friday’s close, is down just over 2%. At their highs, 10-year Treasury note yields backed up about a quarter percentage point. Whatever history points to for future performance, Stovall noted there is no certainty about the path ahead. “No one knows if the current crisis will result in a new ‘garden variety’ bear market (-20% to -39.9%) or another meltdown,” he wrote. @CL.1 5D mountain West Texas Intermediate over the past five days.
