Several factors were responsible for this, although the 1973 oil shock was probably the most dominant.
Somewhat ominously, last Friday marked 50 years since the Yom Kippur War started.
This armed conflict also started with a surprise attack against Israel from a group of Arab states (including Egypt and Syria), and it was a catalyst for the oil shock.
America’s outsized support for Israel ultimately led to an oil embargo (orchestrated by Saudi Arabia) against the US and others, which lasted from October 1973 to March 1974.
The embargo saw the price of oil increase almost fourfold, from under US$3 a barrel to almost US$12 within a matter of months.
US inflation was already high at the time, but it surged to 12 per cent by the end of 1974. The economy fell into recession and unemployment peaked at 9 per cent in 1975.
As a result, the entire decade of the 1970s was abysmal for investment returns.
US shares, corporate bonds and real estate all posted annual gains of 5-7 per cent. However, none kept pace with rampant inflation, which meant that in “real” terms, investors went backwards.
It was even worse here in New Zealand, where inflation averaged 12 per cent per annum, outpacing the local sharemarket and completely eroding 10 years’ worth of house price rises.
There weren’t many places to hide, with gold and commodities two of the only things that performed well. Gold surged 14-fold over the decade, and since then it hasn’t come remotely close to repeating those returns.
Farmland was also strong, on the back of the high commodity prices and demand for tangible assets that were more insulated from higher inflation.
Despite the eerie similarities today, I don’t think we’ll see a repeat of the 1970s.
The world’s central banks are acutely aware of what happened back then, and they don’t want to make similar mistakes by taking inflation too lightly.
Like others, the Federal Reserve in the US has embarked on its most aggressive tightening cycle in decades, and its policy rate is now comfortably above the inflation rate.
We’ve also seen the supply chain disruptions of the pandemic era ease, while commodity prices have come down from the highs we saw in the wake of the initial conflict in Ukraine last year.
We do need to keep a close eye on oil prices, as these will almost certainly rise if today’s tensions ratchet up further.
The global economy isn’t as energy-intensive as it was 50 years ago, but a spike in oil would add to the inflationary pressures we’re battling.
Financial markets find it extremely difficult to put a price on geopolitical issues, which are inherently unpredictable.
We often see volatility prevail in the immediate aftermath, although if the conflict is contained, markets do tend to shake things off and move on relatively quickly.
We’d expect the typical flight to safety if we see further tensions, which means safe-haven assets will hold up best. This includes gold, the US dollar and high-quality fixed income.
In terms of equities, defensive companies and those in the energy sector are likely to prove resilient, while the US market could perform better than higher-risk regions such as emerging markets.
Let’s hope this conflict subsides soon, rather than continuing or getting worse.
In the meantime, investors should take a safety-first approach, and avoid making any rash decisions.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
