War, Oil, And S&P 500: Here's How The Stock Market Behaves In Energy Crises

The U.S. strike on Iran's nuclear facility on June 21 has raised the specter of a new oil crisis, reviving investor fears of energy-driven inflation and testing whether the stock market can withstand another geopolitical shock.

Historical precedent offers a guide to how the S&P 500 index responds to energy-driven geopolitical upheaval—and the record shows that outcomes vary sharply depending on the broader economic context.

How Did The S&P 500 React To Past Oil Crises?

In the first major oil shock in October 1973, triggered by the Arab oil embargo, the S&P 500 – as tracked by the Vanguard S&P 500 ETF VOO – plunged 11.3% within a month and was down 41% one year later.

The second oil shock in January 1978, tied to the start of the Iranian revolution, saw a more minor short-term hit—down 6.2% over a month—but the index recovered 5.3% over 12 months.

During the first Gulf War in August 1990, the S&P 500 fell 9.4% in a month but rebounded 8.6% over the following year. In contrast, the 2003 Iraq invasion saw modest gains of 0.8% in one month and a strong 35% surge over 12 months.

The 2022 Russian invasion of Ukraine brought an initial 3.7% gain in the S&P 500, but the index declined 12.4% a year later amid inflation and interest rate concerns.

The Real Market Damage May Come After The Oil Shock

While oil prices tend to surge during geopolitical shocks, history shows that the stock market pain often arrives later, when elevated energy costs start fueling inflation and central banks are forced to act by raising interest rates, thus reducing economic growth.

Prices peaked in January 1974 in the wake of the 1973 oil shock. The Federal Reserve raised interest rates in March of that year.

As borrowing costs rose, the S&P 500 extended its decline, falling another 25% until it bottomed in October 1974. The oil shock initially triggered volatility, but the real equity damage came after monetary tightening.

A similar pattern followed the 1979 oil crisis. Oil peaked in May 1980, then fell 30% over the next three years.

However, the S&P 500 didn't bottom until July 1982, after falling 25% between November 1980 and mid-1982. This period coincided with Federal Reserve Chairman Paul Volcker raising interest rates to a record 20%, keeping them in double-digit territory until August 1982 to crush inflation.

The 2022 Russia-Ukraine war followed the same blueprint. Oil surged to $130 per barrel in March, then slid to $80 by October. The S&P 500 suffered a 20% drawdown from March to October 2022 as the Federal Reserve began lifting interest rates, then accelerated the pace of hikes through the summer.

These episodes reveal a consistent pattern: initial oil shocks may trigger a knee-jerk reaction in markets, but the most damaging effects emerge as inflation lingers, central banks raise rates, and growth weakens.

Bottom line, oil spikes alone don't always sink equities.

But when prices stay high for months, the inflationary pressure builds, forcing central banks like the Federal Reserve to respond with tighter monetary policy.

That's when the real trouble begins.

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