The S&P 500 (^GSPC 1.01%) closed Wednesday’s trading at 6,775.8, having fallen roughly 3.2% from its all-time high set in late January. The decline has real potential to continue.
The war in Iran has effectively shut down traffic through the Strait of Hormuz, the maritime chokepoint connecting the Persian Gulf to the rest of the world, cutting off roughly 20% of global crude oil supply. Research firm Rapidan Energy has called this the “biggest oil supply disruption in history.”
On Monday, Brent crude, a global benchmark, nearly hit $120 per barrel, a level not seen since Russia’s invasion of Ukraine in 2022. It’s since retreated to around $100, but it remains more than 38% higher than before the war began.
A spike like that has implications for the entire economy — and the stock market. The last three times oil prices surged this sharply, the S&P 500 followed a relatively consistent pattern.
Image source: Getty Images.
What happened to the S&P 500 during the last three major oil shocks
The three most recent oil supply shocks occurred during the Gulf War in 1990, the financial crisis in 2008-09, and the Russia-Ukraine conflict in 2022. In each case, the S&P 500 followed a basic arc: a sell-off, a choppy bottoming process, and then a recovery once oil prices stabilized.
The 1990 Gulf War is the cleanest example. When Iraq invaded Kuwait and oil spiked, the S&P 500 fell about 16% over three months. But the conflict resolved relatively quickly, Saudi Arabia increased production to offset lost supply, and the market recovered within about six months of hitting bottom.
Data by YCharts.
When Russia’s invasion of Ukraine choked off a significant portion of global oil and gas supply, inflation — which was already elevated from pandemic supply chain issues — accelerated sharply. The Federal Reserve responded by raising interest rates at the fastest pace in decades.
The S&P 500 dropped roughly 25% from its January 2022 peak before bottoming out in October of that year. But investors who held through that decline saw the index recover a little over a year after the market hit bottom.
The 2008 crash is more of an outlier. Oil hitting $147 per barrel was part of the story, but the housing collapse and banking meltdown were the primary forces driving a 57% decline in the S&P 500. Oil prices didn’t help the situation, but they were hardly a major cause of the collapse.
Why this time could play out differently
First, the shock could be very short-lived — that’s a possibility if the Strait can be opened and the U.S. releases part of its strategic reserves. And second, even if the shock is sustained, the U.S. is arguably in a better position to handle one than it was in both 1990 and 2022. Domestic production is at record highs, and the U.S. is much less reliant on foreign oil than in the past.
Still, the reality is that this kind of volatility around the world’s most important oil chokepoint is likely to impact prices for some time, regardless of any potential de-escalation or a forced reopening of the Strait. Traders will still fear that tensions could flare up again at any time.
Today’s Change
(-1.01%) $-68.20
Current Price
$6707.60
Key Data Points
Day’s Range
$6680.10 – $6740.88
52wk Range
$4835.04 – $7002.28
Volume
1.6B
What we can learn from history
This shock resembles 1990 or 2022 more than it does 2008. History would suggest that while the market could fall further, it will be relatively short-lived. That being said, the economy today is more fragile than it was in 1990, and inflation is rising, much like in 2022. But unlike that year, the labor market is softening at the same time — a combination that limits the Federal Reserve’s ability to respond aggressively.
And hanging over all of it is the question of whether the massive capital expenditure cycle in artificial intelligence (AI) represents sustainable growth or something closer to a bubble. Companies across the AI supply chain — from hyperscalers to data center operators — have taken on enormous debt to fund this build-out, and that debt wouldn’t respond well to sudden rate hikes. The echoes of 2008 are at least worth acknowledging.
Still, a 2008-style repeat is unlikely today. And investors who panicked during the 1990 and 2022 oil shocks likely lost money as the market rebounded relatively quickly.
For long-term investors, the most important thing right now isn’t predicting where oil prices go next week. It’s staying patient and taking the opportunity to examine your portfolio. Are you invested in companies you believe in over the long term?