Reviewing the oil price shocks of the past 50 years: For the market now, only two things matter most!

Cailian Press, March 10 (Editor: Xiaoxiang) Over the past week, almost all major asset classes experienced volatility due to the joint attack by the U.S. and Israel on Iran, triggering one of the most intense recorded surges in oil prices.

Wall Street strategists are closely analyzing various scenarios for the markets and the global economy. Discussions about the short-lived impact of geopolitical shocks are common—at least in financial markets.

However, Manish Kabra, Head of U.S. Equity Strategy at Société Générale, pointed out that examining oil price shocks over the past 50 years might provide some clues about what truly matters for investors’ portfolios today.

He believes that, based on historical experience, the two most critical issues in today’s global markets are: How long will the oil price shock last? How will the Federal Reserve and other central banks respond?

A third possible conclusion is: How much pain must the market endure to prompt President Trump to decide to scale back or abandon U.S. military involvement? Recent developments suggest this moment may be approaching—President Trump stated in an interview on Monday that the war is “basically over.”

Five Historical Precedents

Kabra’s analysis focuses on five historical events that caused oil prices to surge: the Russia-Ukraine conflict in 2022, the Iraq War in 2003, the Gulf War in 1990, the Iranian Revolution in 1979, and the OPEC embargo during the Yom Kippur War in 1973.

In a written comment, Kabra noted, “It fundamentally depends on two variables: 1) the duration of the shock; 2) the Federal Reserve’s response mechanism.”

He explained that economic recessions triggered by oil shocks in the 1970s were often exacerbated by Fed tightening policies. Three out of five oil shocks led to U.S. recessions, while the last two occurred when economic growth was more resilient.

History shows that during such events, the U.S. stock market often outperforms international peers, and the dollar usually gains strength.

The table below details the average performance of major asset classes one week, three months, and six months after these events.

The Federal Reserve’s response is equally crucial

Kabra further explained that historical experience indicates oil price shocks typically subside within three months. But market focus is not only on oil price fluctuations: the Fed’s response also plays a significant role.

CME’s FedWatch tool shows that recent interest rate futures traders are betting that the surge in oil prices will reduce the likelihood of the Fed cutting rates again this year. Some traders even bet that if rising oil prices push inflation higher, the Fed might raise interest rates.

However, it’s worth noting that market indicators reflecting long-term inflation expectations have not shown significant volatility, suggesting that markets still expect inflation impacts to be relatively short-lived.

Kabra cited the 5-year/5-year forward breakeven inflation rate as an example, which is derived from trading in U.S. Treasury markets and measures inflation expectations. It indicates investors’ expectations for the average inflation rate over the next five years starting five years from now. Since summer, this indicator has been trending downward.

Kabra stated, “Ultimately, it will be up to the central banks to decide whether to ignore the temporary spike in prices.”