From October 1973 to October 1990, over a span of seventeen years, there were three oil crises. The stock market's response grew increasingly complex and thought-provoking with each occurrence.
1973: The Fourth Middle East War
On October 6, 1973, Egypt and Syria launched a surprise attack on Israel, marking the outbreak of the Fourth Middle East War. Although the war itself did not last long, it opened a Pandora’s box.
Shortly after the onset of hostilities, the United States quickly provided emergency military aid to Israel. The response from Arab oil-producing countries was swift: On October 16, Kuwait, Iraq, Saudi Arabia, and three other countries announced a 17% increase in crude oil prices; the next day, the Organization of Arab Petroleum Exporting Countries (OAPEC) declared a 5% production cut each month; on October 18, Abu Dhabi took the lead in halting oil supplies to the United States, officially initiating the oil embargo.
Oil prices began to soar. From $2.7 per barrel in September, they jumped to $4.1 in October, and by January 1974, had surged to $13. In just three months, prices rose nearly fourfold.
The stock market decline had already begun before the sharp rise in oil prices.
By the end of 1972, the U.S. stock market had already peaked. In early 1973, the S&P 500 began to reverse its upward trend. The reason was that the U.S. economy showed signs of weakness by the end of 1972, with industrial production growth peaking and then declining. At the same time, inflation started climbing from the beginning of the year, which was not caused by oil but rather by the retaliatory price hikes following the lifting of previous price controls, compounded by a global food crisis. In 1973 alone, food accounted for 51% of the rise in the U.S. Consumer Price Index (CPI).
To curb inflation, the Federal Reserve began raising interest rates at the start of 1973, and by August had done so consecutively seven times.
When the oil crisis erupted in October, the U.S. stock market had already been in a downward trajectory for nine months. Therefore, the oil embargo was not the starting point but rather an amplifier.
To what extent did it amplify? Between 1973 and 1974, the cumulative decline of the S&P 500 reached 42%. The Dow Jones Industrial Average fell approximately 45% from its high in January 1973 to its low in December 1974.
During those two years, the U.S. stock market completely ended the “Nifty Fifty” bull market that had lasted for two and a half years. Moreover, the companies within the Nifty Fifty that had risen the most during the earlier period experienced the steepest declines this time around. The market later coined a term for this phenomenon: the “reversal effect.”
In January 1974, when oil prices reached a peak of $13, the U.S. CPI year-over-year had already reached 9.6%. By November, the CPI surpassed 12%. The unemployment rate climbed to 9% in May 1975. As for economic growth, the first quarter of 1974 was already at -3.3%.
This was not a simple recession; it was "stagflation," a term that would later be written into textbooks.
One detail worth remembering is this: On March 18, 1974, Arab countries announced the lifting of the embargo on the United States. On the same day the news broke, the Dow Jones Industrial Average fell by 1.5%. The market did not see it as positive news because the real trouble—high inflation, high interest rates, and economic contraction—had already taken root.
Across the Pacific, Japan's stock market was not spared either. The Nikkei 225 fell from 5,236 points in 1972 to 3,764 points in 1974, a decline of 29%. At that time, Japan was in the midst of its heavy industrialization phase, with an average annual GDP growth of 10% between 1963 and 1973, and extremely high dependence on foreign oil imports. In 1974, Japan's wholesale prices rose by 31.4%, while consumer prices increased by 24.3%. Under tight monetary policies, industrial output fell by 20%, leaving 1.3 million people unemployed.
Perhaps the most severe case was Hong Kong's stock market. The Hang Seng Index reached a historical high of 1,774 points in March 1973 but dropped to 818 points in April, losing half its value in a single month. By the end of 1973, the Hang Seng Index closed at 433 points, down 49% from the previous year and 76% below the year's peak. In 1974, the Hang Seng Index plummeted another 61% to close at 171 points. From its highest point, the index lost 91.5% over two years.
1979: The Iranian Islamic Revolution
Four years after the first oil crisis, oil prices stabilized between $10 and $12 per barrel. In 1978, the global economy was recovering.
Then, Iran had its crisis.
In early 1978, Iran experienced an Islamic revolution. In January 1979, the pro-American Shah Mohammad Reza Pahlavi went into exile abroad, and in February, Ayatollah Khomeini returned to take power. Iran’s oil exports plummeted from 5.8 million barrels per day to less than 1 million, suddenly removing nearly one-tenth of global supply from the market.
From November 1978 to February 1979, oil prices surged from $13.2 to $20.8. By November 1979, they had broken through $40.
This time, the stock market's reaction was completely different.
From 1979 to 1980, the S&P 500 rose by a cumulative 41%. This means that during the second oil crisis, the U.S. stock market actually increased. By the end of 1980, the S&P 500 was over 30% higher than at the end of 1978.
From 1979 to 1980, U.S. GDP growth slowed, and the CPI surged to 14.8% in March 1980. Given the same 'stagflation,' why did the stock market perform so differently?
A research report from Guoxin Securities provided two explanations.
First, the starting valuation was different. Before the outbreak of the 1973 oil crisis, the 'Nifty Fifty' rally had already pushed valuations to high levels, leaving the market itself at a peak. By contrast, at the end of 1978, the S&P 500’s valuation had undergone five years of adjustment and was at a relatively low level.
Second, the market’s inflation expectations changed. In August 1979, Paul Volcker became Chairman of the Federal Reserve. His mission was clear to the market: tame inflation, at all costs. Eventually, he raised the federal funds rate above 20%, and by 1982, inflation was finally under control, though at the cost of an economic recession. However, by the end of 1979, the market began to believe that inflation was finally being addressed.
Another structural factor worth noting is that during the second oil crisis, energy stocks performed exceptionally well. While the S&P 500 as a whole rose, if you didn’t invest in energy stocks, you might not have outperformed the index.
The Japanese market followed an even stronger trajectory. The Nikkei Index rose from around 5,000 points in 1978 to 8,019 points in August 1981.
The logic behind this was that after the first oil crisis in 1973, Japan spent five painful years transitioning its industries from heavy chemical industries to energy-efficient manufacturing. By 1979, fuel-efficient cars produced in Japan were gaining market share in the U.S. In 1970, Honda sold only 1,300 vehicles in the U.S.; by 1975, that number had reached 100,000. While the second oil crisis dealt a blow to American consumers, it presented an opportunity for Japanese automakers.
The Hong Kong stock market saw even more dramatic gains. From 1979 to 1980, the Hang Seng Index rose by 197%. Of course, local factors such as real estate and finance played a role, and it wasn’t entirely due to the oil story.
1990: The Gulf War
On August 2, 1990, Iraq invaded Kuwait.
Saddam Hussein acted swiftly, and Kuwait's oil fields quickly fell under Iraqi control. Both countries' oil exports were disrupted, resulting in a sudden reduction of about 20% in global supply. Oil prices surged from $14 per barrel in July to over $40 by October.
Panic spread rapidly. In October 1990, the Dow Jones Industrial Average plummeted to 2,365 points, marking a new yearly low. During the third quarter of 1990, the S&P 500 dropped by 14.74%, making it one of the worst quarters on record.
The International Energy Agency (IEA) activated an emergency plan, releasing 2.5 million barrels of strategic reserve oil into the market daily. Countries like Saudi Arabia quickly ramped up production to fill the gap. By November, oil prices began to retreat.
On January 17, 1991, the Gulf War commenced. Unexpectedly, gold prices fell that day while stock markets rallied. Within 40 days of the war's start, U.S. equities rose by 20%. For the entire year of 1991, the Nasdaq index gained 56%.
Why? Because the war itself had already been priced into the market in advance. The low point in October 1990 was when the market was trading on the extreme scenario of 'Saddam saying he would burn all the oil fields.' When the war actually began, and with an outcome that matched the market’s expectations of a swift resolution, funds started to flowsafe-haven asset.back into the stock market.
From the October 1990 low to the year 2000, major U.S. equity indices quadrupled. It was the decade of the internet, and the Gulf War was merely a prelude.
Patterns and Insights from the Data
Looking at the three crises collectively offers some noteworthy reflections.
First, real damage often lags. In October 1973, during the oil embargo, the S&P fell 11% in a month, but the real bear market came a year later—dropping more than 30 points. This was because after oil prices rose, inflation surged, central banks hiked interest rates, and only then did the economy and corporate profits truly suffer. In March 1974, when the Federal Reserve raised interest rates, the stock market plummeted another 25% before bottoming out. A similar scenario occurred in 1990: oil prices soared in August, the stock market declined until October, but it only reversed after the war began.
Second, not all sectors are declining. In the third quarter of 1990, 370 stocks on the U.S. stock market rose while 3,744 fell. What rose? Freeport-McMoRan Copper, Apache Corp, Western Gas Resources, and others—all energy and resource stocks. When oil prices rise, the balance sheets of oil and gas producers and drilling service providers benefit. Similarly, during the first crisis in 1973, the materials, telecommunications, and energy sectors were relatively resilient, while real estate and industrials suffered the most.
Third, dependence on oil imports determines market elasticity. In the third quarter of 1990, the stock markets of major oil-importing countries such as Japan, France, Germany, and Italy fell by more than 25%. Rising oil prices mean widening trade deficits, rising corporate costs, and pressure on domestic currencies. However, Britain and the United States, which have their own domestic oil industries, limited their declines to around 15%.
Fourth, the reasons behind stock market declines are often more complex than they appear on the surface. By 1973, before the oil embargo, inflation had already risen, economic growth had slowed, and the Federal Reserve had started raising interest rates. Oil added fuel to the fire, but it wasn’t the initial spark. The Watergate scandal also unfolded between 1973 and 1974, but looking back, those two years of bear markets were primarily driven by economic issues. In 1999, when Clinton was impeached, the stock market was still rising.
So, why were 1990 and 1973 so different?
The first time, there was no preparation. Before 1973, the Western world was accustomed to cheap oil. There were no strategic reserves, no emergency mechanisms, and no alternative energy sources. When the embargo hit, the only thing people could do was line up for gasoline.
The second time, lessons had been learned, but they were insufficient. By the time of the 1979 revolution, Western countries had built some reserves, but these were not enough to counter panic-driven “inventory restocking.” In 1980, Western nations’ oil reserves reached 5.3 billion barrels, with 1 billion barrels added in just one year (1979). This safety-driven rush to buy only drove oil prices higher—a classic case of a self-fulfilling prophecy.
By the third instance, in 1990, the IEA’s coordination mechanisms were already established, and strategic petroleum reserves could be quickly deployed to the market. Additionally, Saudi Arabia had spare production capacity to ramp up output. Seeing this, market panic was reduced by half.
Another hidden factor: in 1973, the U.S. was still the world's largest oil importer. By 1990, though it remained a major importer, oil fields in the North Sea and Alaska had begun to supply energy. The diversification of energy sources meant the dispersion of risks.
In this historical context, Japan’s story is particularly worth mentioning separately.
During the first crisis in 1973, the Nikkei fell by 29%. However, after the decline, Japan took several actions: it adjusted its industrial structure, shifting from heavy chemical industries to energy-saving manufacturing; promoted technological innovation, with Toyota developing fuel-efficient technologies; and explored new markets by selling fuel-efficient cars to the United States.
By the time of the second crisis in 1979, Japanese automakers instead found themselves presented with an opportunity. While American consumers were queuing up for gasoline, Honda Civics and Toyota Corollas became highly sought-after products. Hence, between 1979 and 1980, the Nikkei saw an upward trend.
This also hints at some subtle signs of technological transformation: crises force transitions, and transitions generate new opportunities. The rise of Japanese automakers in the 1970s serves as the best evidence of this.
Overall, the impact of oil crises on the stock market depends on several factors: the valuation levels at the time of the crisis, the central bank’s stance on inflation, the economy's dependence on oil, and the preparedness of the market.
No two crises are exactly the same. However, one consistent pattern across the three cycles is that what truly hurts the stock market is never the oil price itself, but rather the chain reactions triggered by it, including inflation expectations, rising interest rates, and downward profit revisions. These variables take time to materialize, so market bottoms often appear six to twelve months after the outbreak of a crisis.
In October 1990, at an investment conference in New Orleans, the host asked the five hundred investors in the audience: who is bullish? Only two people raised their hands, accounting for just 0.4%. That was precisely when the Dow Jones Industrial Average stood at 2,365 points, marking the starting point of a decade-long bull market.
This is not blindly encouraging optimism. It merely illustrates that when everyone believes in bad news, prices often already reflect the negative sentiment. This has been validated in 1974, 1980, and 1990.
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Editor/joryn
