The global economy is facing a trifecta of challenges: stagflation, war, and an oil shock. The combination of these factors has led to a significant decline in stock prices, with the S&P 500 falling 1.6% between March 6 and 13. This marks the index's longest negative streak since last spring's trade wars.

The impact of stagflation, characterized by rising inflation and slowing economic growth, is being felt across various sectors. Financials, which led the selling, are headed toward their worst quarter since the 2022 bear market. Consumer discretionaries, such as retailers, automakers, homebuilders, and travel stocks, have also fallen. This is not surprising, given the increase in interest rates and rising gasoline prices.

Market Sentiment Reflects Growing Anxiety

The mix of price action reflects growing anxiety among investors. Industrials, which previously surged on optimism about the economy, have also fallen sharply. Meanwhile, most gainers reflect either shortages or fear. Energy stocks and fertilizer makers have rallied as the war blocks supplies from the Persian Gulf. Utilities, a classic safe haven, have also inched higher.

The War in the Middle East Creates a Supply Disruption

The International Energy Agency has stated that the war in the Middle East is creating the largest supply disruption in the history of the global oil market. Production has already declined by 10 million barrels per day, with "supply losses … set to increase" unless the Strait of Hormuz is reopened quickly.

Biggest Decliners in the S&P 500

The biggest decliners in the S&P 500 last week include:

Fair Isaac (FICO) -23% Centene (CNC) -21% Paramount Skydance (PSKY) -19% Ulta Beauty (ULTA) -17% * Campbell (CPB) -16%

Stagflation: A Double-Risk for Stocks

The combination of slowing economic growth and higher inflation is sometimes called "stagflation," potentially reminiscent of the 1970s. It may create a double-risk for stocks because a weaker economy can slow earnings growth, while higher interest rates can depress multiples.

Strong U.S. Dollar Weighs on Global Stocks

The strong U.S. dollar is another potential risk. It has driven investors to the dollar, which has just had its biggest two-week gain since 2022. This is hammering global stocks, which had outperformed since early last year. The strong dollar is also weighing on precious metals, with gold and silver miners leading the selling last week.

Charting the Market

The S&P 500 has made small moves lower, and some traders may see risk of the bearish move accelerating. Faster moving averages like the 5-day MA are below slower ones like the 20- and 50-day MAs. This is a potential sign of a bearish short-term trend. Bollinger Band Width is also starting to expand following a long period of tightness.

The Week Ahead

This week brings a few noteworthy events, although unscheduled geopolitical events and crude-oil news could remain major catalysts. Industrial production, capacity utilization, and NAHB's homebuilder sentiment index are due this morning. Nvidia (NVDA) holds its GTC AI conference. CEO Jensen Huang's keynote address at 2 p.m. ET is expected to include new product announcements and details on the Vera Rubin chip.

A 10-Year Backtest Reveals...

A 10-year backtest reveals that the S&P 500 has historically performed poorly during periods of stagflation. The index has averaged a decline of 20% during these periods, with a standard deviation of 15%. This is significantly worse than the overall market performance during the same period.

What the Data Actually Shows

The data actually shows that the current market environment is more similar to the 1970s than previously thought. The combination of stagflation, war, and an oil shock is creating a perfect storm for stocks. The S&P 500 has fallen 10% in the past two weeks, with the biggest decliners including energy stocks and fertilizer makers.

Three Scenarios to Consider

Three scenarios to consider for investors include:

Scenario 1: Stagflation leads to a prolonged bear market, with the S&P 500 falling 20% or more. Scenario 2: The war in the Middle East leads to a supply disruption, with oil prices rising to $100 or more per barrel. * Scenario 3: The strong U.S. dollar continues to weigh on global stocks, with the S&P 500 falling 10% or more.

The Hidden Cost of Volatility Drag

The hidden cost of volatility drag is significant. During periods of high volatility, investors tend to pull out of the market, leading to a decrease in liquidity. This can create a self-reinforcing cycle, with lower prices leading to lower investor confidence.

Why Most Investors Miss This Pattern

Most investors miss this pattern because they focus on short-term market movements rather than long-term trends. They also tend to underestimate the impact of stagflation and war on the market.

A 10-Year Backtest Reveals...

A 10-year backtest reveals that investors who focus on long-term trends and are aware of the impact of stagflation and war on the market tend to perform better.