Market volatility through a historical lens: Insights from Denise Chisholm - March 26, 2026

How equity markets have historically behaved during geopolitical stress

Periods of geopolitical conflict and oil price volatility often trigger sharp market reactions. However, historical data shows equity markets have frequently remained resilient through these episodes. Looking across past conflicts, equity markets have delivered average returns of roughly 8 percent in the year following the onset of conflict and have risen about 70 percent of the time, broadly in line with long‑term averages. While market corrections and recessions do occur, geopolitical risk does not automatically translate into long‑term equity weakness. Markets often price in fear quickly and short‑term volatility does not necessarily derail longer‑term outcomes.

Why today’s oil shock differs from the 1970s

One of the central questions investors are asking is whether rising oil prices could trigger a repeat of the stagflationary environment of the 1970s. The analysis suggests the backdrop today is structurally different.

Several long‑term changes help explain why:

1. Energy spending now represents about 3 percent of consumer income, down from roughly 8 percent in the 1970s, reflecting significant gains in energy efficiency.
2. The U.S. has shifted from being a net importer of oil to a net exporter, largely due to shale production.
3. Global supply dynamics are more balanced, reducing the economy’s sensitivity to oil price shocks.

Because of these changes, higher oil prices today tend to have a more muted and less automatic impact on economic growth than in past decades. Even following the Russia‑Ukraine conflict, which produced one of the largest supply shocks on record, the U.S. economy avoided a recession.

Offsets are cushioning the impact on consumers

Oil price shocks do not occur in isolation and their impact depends on what else is happening in the economy. While higher energy prices can pressure household budgets, several offsetting factors are currently helping to absorb that impact at an aggregate level. These include tax rebates and lower tax withholdings, estimated to total roughly $150 billion on an annualized basis. In addition, reductions in effective tariff rates, from about 13 percent to closer to 8 percent, may be contributing another $50 to $60 billion in relief. While these offsets do not benefit all income groups equally, they help explain why consumer spending and economic activity have remained relatively resilient despite higher fuel costs.

Oil price levels, duration, and inflation risk

The economic impact of higher oil prices depends not just on how high prices rise, but on how long they stay elevated. Historically, meaningful demand destruction has tended to occur when energy costs rise to roughly 5 percent of income. That threshold has typically been associated with oil prices in the range of approximately $135 to $150 per barrel. Importantly, those levels usually need to persist for nine to twelve months to significantly increase the probability of sustained inflation or recession risk. Shorter‑lived oil price spikes lasting six months or less have historically had less than a 50 percent chance of leading to prolonged inflationary pressure. Based on these historical patterns, recent oil price increases, while notable, have not yet reached the levels or duration most associated with broader economic disruption.

How central banks have historically responded to oil shocks

Looking at past data, larger oil price increases have often been associated with a lower probability of interest rate hikes in the following six months. At current oil price levels, the historical likelihood of a rate hike has been closer to 25 percent rather than a certainty. Higher oil prices tend to act like a tax on consumers. When more income is directed toward energy costs, less is available for other spending, which can limit the risk of broad‑based inflation. As a result, central banks have often chosen to look through oil‑driven inflation shocks rather than respond immediately with tighter policy.

Market discounting and investor behavior

There is a disconnect between fear in equity markets and conditions in credit markets. While equity sentiment remains elevated, credit markets continue to show relatively little stress, with stable lending conditions and ongoing loan growth. Historically, this type of disconnect has often coincided with markets continuing to move higher over time. One of the greatest risks for investors is reacting to fear by reducing equity exposure, which can dilute long‑term returns. While equities have historically delivered average annual returns of around 8 percent, many investors earn far less due to behavioral decisions, such as selling during periods of heightened uncertainty and re‑entering after markets have already recovered.

Denise’s sector perspectives: top and bottom sectors

Top sectors:

1. Technology, supported by historically low relative valuations and long‑term productivity themes such as artificial intelligence.
2. Industrials, reflecting an improving manufacturing backdrop and signs of economic inflection.
3. Housing‑related areas of consumer discretionary, which have already priced in a more challenging economic outcome and could benefit if interest rates stabilize or decline over time.

Bottom sectors:

1. Energy, particularly after sharp price and performance increases, as supply‑driven oil shocks have historically been followed by relative underperformance.
2. Consumer staples, where pricing power may be under pressure.
3. Utilities, which have already seen price increases and may be less attractive if markets stabilize.

Conclusion: Staying steady when fear is loudest