The S&P 500 recently had a 7% pullback amid ongoing geopolitical tensions, coupled with rising oil prices and interest rates. This article delves into significant economic and geopolitical events of the past, comparing them with recent market movements to uncover patterns that could help anticipate future trends. By understanding the consequences of past geopolitical tensions, we can better navigate the possible challenges and opportunities in today’s market environment.
The Six-Day War and Its Economic Aftermath
On June 5, 1967, Israel initiated a preemptive air strike against Egypt, which is now called the Six-Day War. This conflict resulted in Israel’s expansion, capturing the Gaza Strip, Sinai Peninsula, and the West Bank, thus altering the Middle East’s geopolitical map. The conflict disrupted oil supply routes and heightened tensions among major global oil powers, thereby setting the stage for market volatility.
The 1970s Oil Crisis and the Era of Stagflation
The decade following the Six-Day War (1970 to 1980) was marked by one of the most challenging periods in modern economic history due to rising oil prices and inflation. Oil prices escalated from a modest $3 per barrel at the start of the decade to a staggering $40 by its end, primarily due to continued Middle Eastern tensions and the OPEC oil embargo. These supply shocks triggered severe inflationary waves in the United States, where inflation reached an unprecedented peak of 15%. As a result, this decade saw 4 severe recessions in quick succession.
This period was characterized by the term “stagflation,” which is a troubling economic scenario combining stagnant economic growth with high inflation rates. During this time, the S&P 500 had multiple declines of over 30%, with a particularly devastating 50% drawdown in 1974, erasing over a decade of gains.
Recent Geopolitical Tensions and Its Impact on the S&P 500 Index
Recently, the Geopolitical Risk Index witnessed its most significant spike since February 2022, which was when Russia invaded Ukraine. This index, which gauges the extent of news coverage related to geopolitical tensions, serves as a crucial indicator of potential market disruptions from a geopolitical standpoint. The corresponding period of the recent spike saw the S&P 500 retrace by 7% from its peak, impacted by rising oil prices and interest rates. Many fear this could signal the onset of a 1970s-like stagflation or a downturn similar to 2022, but we don’t think that’s the case yet.
Oil Dynamics and Current Market Movements
In 2022, the aftermath of Russia’s invasion into Ukraine saw oil prices break out above critical resistance levels, and remaining elevated for several months. High oil prices increased transportation costs, leading to reduced consumer spending and contributing to economic weakness throughout the year.
Contrasting this period, current oil price movements have shown a rejection at a key level of resistance, indicating that, despite ongoing geopolitical tensions, the market is not be bracing for an oil shock similar to that of early 2022. This is also why we have an ongoing short on oil at Game of Trades.
Analyzing Market Indicators: Death Cross and Oversold Conditions
Market indicators provide essential insights into underlying market conditions and investor sentiment. The ‘death cross,’ observed shortly after the invasion of Ukraine, where the 50-day simple moving average crosses below the 200-day simple moving average, signaled a bearish market turn. This indicator reflected a shift in momentum, preceding a 20% drop in the stock market.
Currently, although the S&P 500 has experienced a correction, it has demonstrated a lot of bullishness by breaking out above a key price channel, suggesting that the curren pullback is just a possible retest rather than a sustained downturn.
Additionally, the S&P 500 recently hit extremely oversold conditions, similar to those seen in October 2023, where only 30% of S&P 500 stocks were above their 50-day simple moving average. Historically, such conditions have often presented attractive buying opportunities during upward trending markets.
Current S&P 500 Index Conditions
The current market situation seems to bear similarity to the conditions in June 1967. This was a period marked by the initial shock following the Six-Day War. The market, in response to this event, initially experienced a drop of 6%. However, this was followed by a substantial rise of 20% in the following 6 months. This serves as an interesting historical point of comparison as we navigate the current S&P 500 conditions.
As of last week, we began to expand our Trade Watchlist by buying the dip. This decision was backed by the market presenting us with multiple oversold signals. We have been specifically targeting names that we believe hold the potential for significant upside in the S&P 500’s next move up.
Conclusion
Drawing parallels between historical economic disruptions and the market trends allows our members to anticipate potential challenges and opportunities in the current market environment. The lessons from the Six-Day War and the subsequent oil rise and inflationary pressures of the 1970s show the potential impact geopolitical events can have on financial markets. However, the current market structures still remain bullish, just as oil has rejected off of a key resistance level. Moreover, S&P 500 market internals are also pointing towards an extremely oversold market, which makes this an attractive buying opportunity. Click here to get a 7-day free trial! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
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