Skip to main content
Lifecycle

The 1973-74 Bear Market and Oil Shock

Pomegra Learn

The 1973-74 Bear Market and Oil Shock

In October 1973, Arab members of OPEC announced an oil embargo against the United States and other nations that had supported Israel in the Yom Kippur War. Oil prices quadrupled in a matter of months, from roughly $3 per barrel to nearly $12. The economic shock that followed was unlike anything experienced since the 1930s—not a crisis of credit or confidence, but a direct assault on the energy cost structure of every modern economy.

The anatomy of stagflation​

Before 1973, most economists believed that inflation and high unemployment were mutually exclusive. The Phillips Curve suggested a stable trade-off: policies that reduced unemployment tended to raise inflation, and vice versa. Stagflation—simultaneous high inflation and high unemployment—shattered this framework. Energy prices cascaded through the economy: higher fuel costs raised transportation costs, which raised the cost of every manufactured good and every agricultural product. Meanwhile, businesses facing higher costs cut production and employment. The Fed faced a genuine dilemma: tighten money to fight inflation and deepen the unemployment, or loosen to support employment and fuel further inflation.

The bear market​

The S&P 500 fell approximately 48 percent from its January 1973 peak to its October 1974 trough—the worst bear market since the 1930s. Unlike the 1929 crash, which was driven by speculative excess and margin liquidation, the 1973–74 decline reflected genuine economic deterioration: corporate earnings fell, dividend cuts became widespread, and the valuations that had seemed reasonable at the bull market peak became clearly excessive in an inflationary environment. High inflation also ravaged bonds, leaving investors with no shelter.

Long gas lines and their political legacy​

The most visceral symbol of the crisis was the gasoline line. Odd-even rationing, introduced in many states, meant that drivers could only purchase gasoline on alternate days based on their license plate number. The images of cars queued around city blocks, and the violence that occasionally erupted at gas stations, created a political imperative for energy security that shaped U.S. policy for decades. The Strategic Petroleum Reserve was created in 1975 directly in response to the embargo's disruption.

Lessons for modern investors​

The 1973–74 episode offers several lessons that remain relevant. Supply shocks can produce inflation that monetary policy cannot easily address without causing severe economic pain. Portfolio diversification across asset classes—including commodities and inflation-protected assets—matters most precisely when it is most uncomfortable to maintain. And the belief that post-war prosperity was permanent, shared by investors and policymakers alike entering 1973, proved costly.

Articles in this chapter​