Worst time to be in stocks? History suggests 90% crude surge drags S&P 500 into losses over 6 quarters
Why it matters: The S&P 500 historically declines 7.2% over two years following a 90% crude surge.
- S&P 500 delivered negative average forward returns across every major time frame following similar oil spikes since 1987, according to Sheth's analysis.
- The index historically declined 3.5% over six months, 7.3% over one year, 8.3% over 18 months, and 7.2% over two years after such crude surges.
- Probability of losses for the S&P 500 increased from 5 out of 11 cases after six months to 10 out of 11 cases after 18 months.
- Brent crude jumped over 60% from $72.48 on February 27 to $119.50 on March 9, driven by geopolitical tensions and fears of supply disruption.
- Higher oil prices act as a "tax on economic growth," pushing up transportation and manufacturing costs, fueling inflation, and increasing bond yields, which pressures corporate margins and consumer spending.
- When oil doubles, earnings expectations usually don't, leading to "multiple compression in US equities."
- Investors in the US and India may need to factor in weaker equity returns in coming quarters, especially when high oil prices are driven by geopolitical disruptions rather than demand recovery.
A significant surge in crude oil prices, mirroring historical patterns, suggests a challenging outlook for the S&P 500, with analysis indicating negative average returns across all major time frames over the next two years. This trend, observed in 11 instances since 1987, shows the probability of losses increasing sharply over time, particularly impacting technology-heavy indices and global portfolios due to higher costs and valuation pressures.
