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

Over the past week, nearly 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 spikes in oil prices.

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

But Manish Kabra, Head of US Equity Strategy at Société Générale, points out that examining oil price shocks over the past 50 years may offer some clues about what truly matters for investors’ portfolios today.

He believes that, based on historical experience, the two most critical questions facing 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 led to surges in oil prices: the Russia-Ukraine conflict in 2022, the Iraq War outbreak 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 notes, “It fundamentally depends on two variables: 1) the duration of the shock; 2) the Federal Reserve’s response mechanism.”

He explains that economic recessions triggered by oil shocks in the 1970s were often exacerbated by the Fed tightening policy. Three of the 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 provides a detailed analysis of the average performance of major asset classes one week, three months, and six months after these events.

The Federal Reserve’s Response Is Equally Critical

Kabra further explains that past experience indicates oil price shocks typically subside within three months. But market focus is not only on oil price fluctuations: the Fed’s response is also highly influential.

The CME FedWatch tool shows that recent interest rate futures traders have bet that rising oil prices will reduce the likelihood of the Fed cutting rates again this year. Some traders even wager 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 cites the 5-year/5-year forward breakeven inflation rate as an example, which is derived from trading in U.S. Treasury markets and reflects inflation expectations. It measures investors’ expectations for the average inflation rate over the five years starting five years from now. Since summer, this indicator has been trending downward.

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