Oil Shock Could Revive 1970s-Style Stagflation, Ed Yardeni Warns

Benzinga_recent_news03-10

A new macro risk is quietly entering the market narrative: stagflation. On Monday, longtime market bull Ed Yardeni warned the current oil shock could revive a stagflation outcome for the U.S. economy ...

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Where are SPY shares going?\nHistorically, the arrival of stagflation triggered economic recessions and bear markets for the S&P 500.\n“Spiking oil prices may precipitate a stock market correction rather than a bear market, but the latter is possible,” Yardeni said. \nSince the start of the war in Iran, crude oil has rallied by 45% while the S&P 500 — as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY) — has fallen by 3%. \nYardeni has long championed a Roaring 2020s bull market through most of this decade, but rising oil prices can now create one of the most difficult economic environments for financial markets: stagflation.\nStagflation occurs when inflation rises while economic growth slows, leaving central banks with limited policy options.\nAlthough Yardeni still sees the Roaring 2020s as his base-case outlook — with a 60% probability for the remainder of the year — he says the balance of tail risks around that scenario has shifted noticeably toward more negative outcomes.\nYardeni cut the probability of a speculative market \"meltup\" to just 5% while raising the odds of a \"meltdown\" scenario to 35% for the current year.\nOil shocks have historically carried an important signal for financial markets. Sudden spikes in energy prices often tighten financial conditions before economic data reflects the slowdown.\nThe most recent example came in 2022, when oil surged following Russia's invasion of Ukraine.\nThe U.S. economy avoided a recession. But the stock market still entered a bear market.\nToday's environment could produce a similar outcome.\nYardeni believes the most likely market reaction is a 10% to 15% correction in equities rather than a full bear market, though the latter cannot be ruled out.\nThe historical template for today's risk lies in the oil crises of the 1970s. In October 1973, Arab members of OPEC imposed an oil embargo during the Yom Kippur War.\nCrude prices quadrupled from about $3 to nearly $12 per barrel, triggering inflation and economic stagnation across the United States.\nThe result was stagflation.\nA second shock followed in 1979 after the Iranian Revolution disrupted global oil supply.\nPrices more than doubled again, pushing an already fragile economy deeper into stagflation and triggering another recession.\nThose crises fundamentally reshaped energy policy and monetary policy for decades.\nDespite the risks, Yardeni believes the U.S. economy is structurally better positioned today than during earlier oil crises. \nThe first reason is declining energy intensity — the amount of energy required to produce economic output. \nEnergy consumption per unit of GDP has fallen about 70% since 1950 and roughly 62% since 1979, reflecting a long-term shift from heavy manufacturing toward service industries. \nFuel-efficiency standards, improvements in internal combustion engines and broader technological advances have reinforced that trend. \nThe second factor is domestic production. U.S. crude output — including natural gas liquids and renewable fuels — now stands near 24 million barrels per day, exceeding domestic consumption of roughly 21 million barrels per day. \nThat makes the U.S. a net energy exporter, a sharp reversal from 2007, when the country imported about 12 million barrels per day. \nAn oil shock that once acted as a pure economic tax now also generates income for American energy producers.\nThe near-term outlook now hinges largely on developments in the Strait of Hormuz — one of the world's most critical oil shipping corridors.\nYardeni warned that as long as Iranian drones continue threatening commercial vessels, the route could remain effectively constrained.\nHis base case still assumes the Roaring 2020s narrative holds. But the longer the Strait of Hormuz remains disrupted, the greater the risk that markets begin to price a stagflation scenario.\nEnergy shocks have historically shifted economic regimes faster than investors anticipate.\nIf oil prices stay elevated long enough for inflation expectations to move higher, the macro framework supporting the bull market could begin to change.\nToward a decade markets hoped never to revisit.\nThe 1970s.\nTo add Benzinga News as your preferred source on Google, click here.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"tenantId":"TBGLOBAL","deviceId":"web-server-community-laohu8-v3","version":"4.36.2","shortVersion":"4.36.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2618805676","isCrawlerRequest":true}