Review of the oil price shocks in the past 50 years: Now, for the market, only two things are most important!

Over the past week, almost all major asset classes have been hit by volatility, as a result of the joint US and Israeli attacks on Iran, triggering one of the most severe surges in oil prices on record. Wall Street strategists are nervously analyzing various scenarios for the market and the global economy. The argument that geopolitical shocks are often short-lived has been seen repeatedly - at least on the financial market level. But Manish Kabra, head of US stock strategy at French Industrial Bank, points out that examining oil price shocks over the past 50 years may provide investors with some clues about what truly matters for their investment portfolios. He believes that based on historical experience, the key issues in the current global market can be summed up in two points: how long will the oil price shock last? How will the Federal Reserve and other central banks respond? Perhaps a third inference is: how much pain does the market need to endure before President Trump decides to reduce or abandon US military intervention? And from the latest developments, this moment may be getting closer - President Trump said on Monday in an interview that the war is "basically over". Five historical precedents Kabra's analysis focuses on five historical events that have led to spikes in oil prices: the Russia-Ukraine conflict in 2022, the outbreak of the Iraq war in 2003, the Gulf War in 1990, the Iranian Revolution in 1979, and the embargo imposed by the Organization of Petroleum Exporting Countries following the Yom Kippur War in 1973. In a written comment, Kabra stated, "It fundamentally depends on two variables: 1) the duration of the shock; 2) the Fed's response mechanism." His analysis shows that economic recessions triggered by oil shocks in the 1970s were often exacerbated by Federal Reserve tightening policies. Three out of five oil shocks led to economic recessions in the US, while the recent two occurrences showed more resilient economic growth. History shows that during such events, the US stock market often outperforms its international counterparts, and the US dollar usually receives a boost. The table below provides a detailed analysis of the average performance of major asset classes in the week, three months, and six months following the events. Federal Reserve's response is also crucial Kabra further explained that past experience indicates that oil price shocks usually subside after three months. But the market is not only concerned about the volatility in oil prices itself: the Federal Reserve's response measures also have a significant impact. The FedWatch tool on the CME Group's website shows that futures traders have bet that a surge in oil prices will reduce the chances of the Fed cutting interest rates again this year. Some traders even bet that if rising oil prices push inflation up, the Fed may raise rates. However, it is worth noting that currently, market indicators reflecting investors' long-term inflation expectations have not shown significant fluctuations, which may indicate that the market still expects the inflation impact to be relatively short-lived. Kabra cited the five-year/five-year forward breakeven inflation rate as evidence, which is derived from trading in the US Treasury market to extrapolate inflation expectations. It measures investors' expectations of the average inflation rate for the five-year period five years from now. Since the summer, this indicator has been declining. Kabra said, "Ultimately, it will be up to the central banks to decide whether to turn a blind eye to temporary price surges." This article is reprinted from "Finance Network", author: Xiaoxiang; GMTEight editor: Feng Qiuyi.