Important points
The war between the United States and Israel against Iran has shaken up markets and caused oil prices to soar, raising concerns about stagflation similar to that seen in the 1970s. The toxic combination of high inflation and slowing growth is often a tricky cocktail for both stock and bond markets, but after Russia’s invasion of Ukraine sent oil prices above $120 a barrel, stocks fell in tandem through 2022. For investors fearful of stagflation and what it could mean for their portfolios, history may provide some answers. In 1973, the OPEC oil crisis and coinciding recession caused the S&P 500 index to plummet by more than 40%, resulting in a decade of lost returns for large-cap stocks, according to Capital Economics. Some investors are drawing comparisons to the 1970s to interpret the direction of the market in 2026, but there are some important differences to note this time. Lessons from Gold and Small Caps The recent rise in oil prices, supported by a weaker dollar, did not produce spectacular returns for gold investors, as was the case in 1973. In fact, the dollar has appreciated against most major currencies. “Gold may be a good hedge against uncertainty, but I think a lot of investors weren’t prepared for the fact that they don’t really like a stronger dollar this time around,” Gum’s head of multi-asset Julian Howard told CNBC in an email. He said the United States is now the world’s largest oil producer and the world’s largest exporter, meaning the country is less susceptible to supply constraints in the Middle East. @LCO.1 YTD Mountain Oil Prices “Higher oil prices have improved the terms of trade for the US economy, pushing up the dollar and in turn weighing on gold,” he added. In the 1970s, stock prices of small and medium-sized companies also soared. From 1975 to 1977, it was the best performing asset class for three consecutive years, according to an analysis by BofA Global Research. Howard said this performance only came after a “brutal” market crash. Howard said that to expect small-cap stocks to outperform in the 2020s would involve a recovery phase from a market crash, something that hasn’t happened yet. Charles-Henry Monchau, chief investment officer at Syz Group, said the 1970s were marked by entrenched far-above-target inflation, stagnant growth and broken policy frameworks, none of which exists today. “This is not the 1970s, but it may be the beginning of something relatively important,” he wrote in a recent note. “(It) could mean a sustained regime shift from paper assets to physical assets and a long-overdue repricing of the physical economy that underpins everything else.” Montchaux told CNBC that the main beneficiaries of the rotation from mega-cap tech stocks to hard assets could be physical assets and related industries such as energy, copper, steel and critical minerals. For now, oil prices remain below the highs experienced after the Russian invasion and the OPEC crisis. Brent futures were down 0.7% at $99.78 a barrel as of 10:10 a.m. ET. The U.S. closed above $100 on Thursday. West Texas Intermediate crude oil futures fell 1.3% to $94.42 a barrel.
