It’s Starting to Look Like 1973 All Over Again. Here’s What That Could Mean for Stocks

Why Investors Are Looking Back to 1973

In the past few months, some market analysts have started making comparisons between the current economic scenario and the global turmoil that characterized the early 1970s. The point of reference is the 1973 Oil Crisis, an era that was characterized by rising oil prices, geopolitical tensions, persistent inflation, and a collapse in the stock markets.

Although history never repeats itself, it sometimes rhymes. The current scenario of geopolitical tensions, uncertain energy markets, and persistent inflation pressures has led investors to wonder if the global economy is poised to enter a phase that is similar to the one experienced in the 1970s.

Learning from the past and understanding how financial markets responded to the events of the 1970s may help investors gear up for the challenges that lie ahead.

The Shock That Rocked Global Markets

The 1973 crisis started when members of the Organization of the Petroleum Exporting Countries imposed an oil embargo on Western nations for their support of Israel in the Yom Kippur War. The abrupt halt in oil exports caused oil prices to skyrocket.

The price of energy quadrupled in a short period of time. Inflation skyrocketed in the developed world, and economic growth came to a grinding halt. The stagflation of prices and growth became a nightmare for policymakers to handle.

The stock markets took a drastic hit. The S&P 500 plummeted by almost 50% in 1973 and 1974, which is one of the worst declines in stock market history. The Dow Jones Industrial Average also suffered a painful decline, wiping out years of investor gains.

The crisis changed the face of economic policy and investor behavior for years to come.

Why Today’s Environment Feels Familiar

There are a number of reasons why comparisons between the current global economy and the pre-1973 market downturn have been made.

One of the most apparent similarities is the return of volatility to the energy markets. Geopolitical instability in the Middle East and other regions has again sparked concerns about the potential disruption of global oil supplies. When oil prices rise, they have a knock-on effect throughout the entire economy, pushing up the price of transportation, production, and consumption.

Inflation is another important consideration. While inflation has eased in some regions, it is still higher than the targets set by central banks in many countries. Rising prices for basic goods such as housing, food, and energy have put pressure on consumer finances and made it difficult for central banks to set monetary policy.

However, economic growth has also started to slow in some of the world’s major economies. This pattern of inflation and slowing growth is reminiscent of the stagflation of the 1970s.

How Stocks Performed During the 1970s

The 1970s were one of the toughest decades for stock market investors in the United States. It was a period when, after adjusting for inflation, many investment portfolios suffered a substantial loss of purchasing power.

High inflation caused a decline in corporate profits, as higher costs of production reduced the value of profits. Higher interest rates made bonds and savings accounts relatively more attractive compared to stocks, causing people to withdraw from the stock market.

However, not all industries performed equally well. Companies in the energy sector benefited from higher oil prices, while some commodity producers also fared well. But sectors that were sensitive to consumer spending and interest rates performed poorly.

Stock market investors who had diversified investment portfolios and were willing to wait for a while saw their losses erased as the stock market recovered in the latter part of the 1970s and in the 1980s.

The Role of Central Banks

The central banks had a very important role in determining the economic outcomes of the 1970s. The policymakers had difficulty in managing inflation and economic growth.

In the United States, the Federal Reserve System later resorted to sharp interest rate increases under Chairman Paul Volcker in the early 1980s. This move helped control inflation but led to a sharp recession.

Today’s central bankers remember this history. They have already indicated that they are prepared to maintain high interest rates if needed to stop inflation from becoming embedded in the economy.

Key Differences From the 1970s

However, despite the similarities, the current economic environment is different from that of the 1970s in a number of ways.

The current economy is less dependent on oil than it was in the past due to improvements in energy efficiency and the development of alternative sources of energy. The current economy is also different in terms of the way products and services are produced due to global supply chains and technological advancements.

This means that even if some of the conditions are similar to those of the 1970s, the results may not be similar.

What Investors Should Watch

For investors, the biggest question is whether the current economic pressures will accelerate or gradually ease.

Energy prices are one of the most significant factors. If oil and gas prices continue to rise, it may lead to higher inflation, and central banks will have to stick to their tight monetary policies.

Lessons From History

Although comparisons to the 1973 crisis may be disturbing, the lessons of history can be valuable.

The markets are cyclical, and times of turbulence are simply a part of the process of investing. Those investors who have a long-term perspective and a diversified portfolio, and who do not make decisions based on short-term market fluctuations, may actually come out ahead of those who are trying to time the market.

The 1970s were certainly a challenging time for investors, but they were followed by one of the greatest bull markets in history in the 1980s and 1990s.

By William Hernandez

Journalist for Vlixx Magazine, reporting on news from around the world, ensuring timely, accurate, and detailed information to keep the public informed and educated.

Sources:

Fool: It’s Starting to Look Like 1973 All Over Again. Here’s What That Could Mean for Stocks.

Market Watch: Why a 1980s conflict may be the best market analog for the current Iran situation

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