Stocks are headed for an oil shock that investors won’t be able to hide from, research firm says

• HFI Research said the stock market could face a “serious decline” as oil prices remain high.

• The energy research firm said markets were pleased with the effects of higher oil prices.

• A ’70s-style pattern has emerged in the markets that could hit stocks and bonds.

Stocks look poised to rise 1970s style decline HFI Research warns this could leave investors with little room to hide.

Energy research firm says it is bracing for more trouble in financial markets oil shock It doesn’t look like it will decrease. US-Iran war ignited the biggest crude oil supply interruption But the company said its shares were “perfectly priced” and that major indexes were near record highs.

Jon Costello, one of the firm’s chief analysts, noted the relatively muted reaction in stocks and oil despite the huge hit to crude oil supplies. Brent crude oilInternational benchmark oil fell 2% on Thursday to around $95 a barrel as traders continued to wait for a new result. Peace agreement with Iran.

HFI suggested that much of the rise was fueled by hopes that a peace deal would be imminent, but that optimism appeared misplaced. Even if the U.S. and Iran reach an immediate deal, supplies are likely to be disrupted for months, the firm said, citing higher transportation insurance costs and an estimate by energy group ADNOC that it would take at least four months to regain about 80% of lost oil supply.

Global oil reservesMeanwhile, supply is dwindling as countries try to fill the gap. According to the Energy Information Administration’s latest update, the US’s Strategic Petroleum Reserve fell to 357 million barrels last week, the lowest level in nearly two years.

HFI added that the situation is similar to the oil shock of 1973, when the oil crisis led to a 48 percent drop in oil prices. S&P 500said Costello. The index has not been able to compensate for these losses for about seven years.

“Persistently high oil prices are acting as a tax on a slowing economy, and sudden price increases are becoming more likely, putting pressure on both the economy and stock prices. The market has priced in none of this, leaving it dangerously exposed to a serious downturn,” Costello wrote in an op-ed. customer note on Wednesday.

bond turmoil

bond market HFI said it would not offer a shelter against an oil-driven selloff. The firm noted growing concerns about inflation that have pushed yields higher in recent weeks. The idea was that higher oil prices could increase inflation in other areas of the economy, which could raise rates over the long term and reduce the appetite for U.S. Treasuries.

10-year US Treasury yield It has cooled after its wartime peak but remains near 4.5 percent; This is an important psychological threshold that indicates investors are worried about the underlying economic picture.

Meanwhile, inflation is still rising. Consumer prices rose 3.8% year-over-year in April, the fastest increase in nearly three years, according to the Bureau of Labor Statistics.

Should higher prices trigger a spark? recession and stock declineCostello predicted it could also hit U.S. tax revenues, raising concerns about the fiscal deficit and pushing yields higher. He pointed out how bonds experienced a prolonged decline after the stock sell-off of the ’70s, with the 10-year U.S. Treasury peaking at around 16% in the early ’80s.

“Bonds Are Not a Safe Haven in a Supply Shock,” Costello wrote. “Investors holding bonds in the hope of a countervailing weight to stocks have instead suffered losses,” he added of historical precedent.

Costello said he didn’t expect the market to be hit as hard as it was in the ’70s because the economy was less dependent on oil, but the market crash in ’73 was “instructive” about what could happen next.

“If oil stays high, it will be similar to the situation in 1973,” he said, adding that he prefers to keep cash in his portfolio and have high-quality names and short-term investments. “Every oil shock for a decade was a buyout. This is what didn’t happen.”

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