The U.S. stock market has started the year on shaky ground as investors scrutinize the labor market’s weaknesses amid a cooling economy. The situation has escalated significantly following recent military actions by the U.S. against Iran, which have led to a surge in oil prices, hitting multi-year highs.
Currently, the S&P 500 index is sitting 6% below its record high, yet historical trends suggest that it could plummet further. Recently, the average price per gallon of gasoline surpassed the $4 mark for the first time since 2022. Notably, each previous occasion this threshold was breached was followed by considerable downturns in the stock market.
As of early April, the average price for a gallon of regular gasoline reached $4.11, marking the highest level in four years. This price point has only been achieved on two other occasions in history: during the summer of 2008 and the spring/summer of 2022. The ongoing U.S.-Iran conflict has reportedly closed the Strait of Hormuz, a crucial maritime route for about 20 million barrels of oil per day—amounting to over 20% of the global supply.
Since the onset of hostilities in late February, WTI crude oil futures have escalated nearly 90%, now resting at $112 per barrel—the highest it has been since June 2022. This increase is already reflected at gas stations across the nation, leading to heightened concerns regarding consumer spending.
Consumer activity is vital for economic growth. As gas prices surge, consumers find less disposable income for other expenditures, which contributes to weakening GDP growth. Consequently, the S&P 500 often mirrors these economic conditions and has previously experienced sharp declines when gas prices rose. Historically, the index has endured bear markets each time average gasoline prices surpassed $4 per gallon, with an average decline of 41% from peak to trough.
Recent warnings from Goldman Sachs analysts indicate that persistent disruptions to global oil supplies could see the S&P 500 drop to 5,400 by 2026, representing a 22% decline from its peak in January. This projection suggests that the index may be on the cusp of entering a bear market.
In March, Mark Zandi, chief economist at Moody’s, expressed concerns that prolonged high oil prices could make an economic recession almost unavoidable. He noted that the S&P 500 has averaged a 32% decline during past recessions, hinting at the potential for even deeper losses ahead.
Given these turbulent market conditions, investors find themselves in a precarious situation. The rapid rise in crude oil prices has exacerbated economic uncertainties, leading to a potential domino effect wherein increased oil costs elevate manufacturing and transportation expenses, thereby inflating the prices of various goods. This could trigger an eventual market crash.
Despite these challenges, many investment experts suggest that the optimal strategy for investors at this time is to selectively purchase undervalued stocks with strong potential for earnings growth over the next five years. Although the S&P 500 may experience further declines in the coming weeks, history shows that the market has consistently recovered from past downturns, leading analysts to believe that current conditions may not deviate from this trend.
