“History doesn’t repeat itself, but it often rhymes.”
There is controversy over the exact wording of this statement and who said it first. However, the premise of this maxim is correct. While current events are not exactly similar to those of the past, they may be strikingly similar.
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I think we’re seeing this firsthand right now. It looks like 1973 again.
A full-blown crisis has broken out in the Middle East. Oil prices are soaring. Higher inflation combined with low economic growth leads to stagflation. The Fed faces a dilemma over how to set interest rates.
This was the situation in 1973. After several countries in the Middle East went to war with Israel, the United States provided supplies to the Israeli army, and Arab members of the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on the United States, causing oil prices to soar.
Core inflation improved to about 3.3% last year. However, the oil embargo triggered a spike in the prices of goods and services, causing inflation to rise rapidly. As the economy entered a recession, U.S. gross domestic product fell sharply. The Fed, with its dual mission of promoting price stability and maximizing employment, is ambivalent.
History students may (and arguably should) experience a sense of déjà vu. No country has yet imposed an oil embargo on the United States. However, Iran’s blockade of the Strait of Hormuz, through which about 20% of the world’s oil supply is transported, caused the price of a barrel of oil to surge by more than 40%. The average price of gasoline in the United States increased by $0.50 per gallon. If the crisis continues, prices for other products will almost certainly rise significantly as well.
At the same time, fourth-quarter GDP growth was revised down to just 0.7%, much lower than expected. Weak growth and concerns about rising inflation are exactly what the Fed doesn’t want to see.
The dynamics of 1973 led to one of the worst stock market crashes in history. this S&P 500 Index (SNPINDEX:^GSPC) By mid-1974, that number had dropped by more than 40%. To make matters worse, the index is dominated by the “Nifty 50,” a group of large-cap stocks with extremely high valuations.
Unfortunately, the rebound from the brutal bear market was not quick. It took the S&P 500 about seven and a half years to return to levels last seen in early 1973. During this period, high inflation also eroded the purchasing power of dividends paid by stocks.
Fast forward to today. There are 50 large-cap stocks that don’t dominate the S&P 500. The so-called “big seven” stocks now make up a third of the index. Like the Nifty Fifty more than fifty years ago, these stocks are priced above historical valuation levels.
Will investors face a “lost decade” like the 1970s? All the necessary ingredients appear to be in place.
If history does rhyme, investors might consider buying commodities (especially gold). For those looking for opportunities in the stock market, energy and gold stocks may be the biggest winners. Keeping more money in U.S. Treasuries may also be a smart strategy. That’s what Warren Buffett was already doing before he stepped down as CEO. Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB).
However, 2026 will undoubtedly be different from 1973. The promise of artificial intelligence (AI) could prevent a sharp market sell-off. The showdown with Iran over the Strait of Hormuz could end relatively quickly. Investors should not assume that the stock market will repeat its performance from years ago.
The wisest thing to do, both in 1973 and now, is to take the long view. Buy stocks of companies that are capable of strong growth over the next 20 years. Even after the downturn of the 1970s, the S&P 500 rose nearly 260% in the 20 years following its 1973 decline. I suspect that whatever happens in the short term, history will repeat itself over the next twenty years.
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Keith Speights is with Berkshire Hathaway. The Motley Fool owns and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
It’s starting to feel like 1973 again. What this could mean for stocks. Originally posted by The Motley Fool