A Stock Market Indicator Just Flashed a Warning Last Seen in 2022. History Says This Will Happen Next.

The S&P 500 (SNPINDEX: ^GSPC) dropped 9% from its peak in March as the Iran conflict drove oil prices higher. That sparked a flight to safety. Investors rotated away from risky stocks in favor of U.S. Treasury bonds, money market funds, and other safe-haven assets.

The S&P 500 has already recouped its losses, but the rebound may be in peril. The Iran conflict has not been resolved, and energy costs are still climbing. Last week, gasoline prices reached an average of $4.25 per gallon in the U.S., the highest level since the summer of 2022.

In fact, the average gas price has only topped $4 per gallon in 44 weeks during the last three decades, which is less than 3% of the time. And the S&P 500 has typically notched double-digit losses over the next six months.

Here's what investors should know.

Image source: Getty Images.

History says the S&P 500 could drop 11% in the next six months

The average U.S. gas price (across all grades) hit $4.25 per gallon during the week ended April 27, according to the U.S. Energy Information Administration. That means gasoline prices have risen about 45% year to date, reaching levels last seen in August 2022.

What does this mean? Elevated gasoline prices reduce consumers' purchasing power, not only because they spend more at the pump, but also because businesses pass along price increases related to higher transportation costs. Consequently, high gasoline prices are usually bad news for the stock market because consumer spending is the primary driver of economic growth.

Indeed, average gasoline prices topped $4 per gallon in just 44 weeks since 1993, and the S&P 500 has declined by an average of 11% during the six-month period following those incidents. In other words, history says the index is headed toward stock market correction territory in the coming months.

Elevated oil prices could tip the U.S. economy into a recession

The Iran conflict has effectively closed the Strait of Hormuz, a waterway in the Persian Gulf that serves as a key transit route of global oil supplies. Its closure has pushed Brent crude oil (an international benchmark) above $100 per barrel for the first time since 2022. For context, prices started the year around $65 per barrel.

Martijn Rats at Morgan Stanley says the price increases could have been transitory had the war ended swiftly, but that outcome is no longer possible because supply disruptions have moved beyond logistics into production. Damaged infrastructure and storage constraints have forced suppliers to cut production, and it will take time to ramp up again.

Even in the best-case scenario, Morgan Stanley analysts estimate oil will average $80 to $90 per barrel this year. But they estimate prices could hit $150 to $180 per barrel if the Strait of Hormuz remains closed for several months. In that scenario, the probability of a recession increases greatly.

Mark Zandi, chief economist at Moody's, recently explained the risks. "Even if the Iran war winds down and oil prices recede quickly, the fallout will ensure there is no GDP pickup or jobs growth this year. Unemployment will rise further, and already considerable recession risks will worsen," he wrote on social media platform X.

Historically, economic downturns have been bad news for the S&P 500. Since its inception in 1957, the index has declined by an average of 32% during recessions.

Here's the big picture: The stock market seems to have gotten ahead of itself. The catalyst that caused the S&P 500 to drop sharply in March has not disappeared, yet the index has already recovered its losses. That leaves considerable risk to the downside in the coming months, so investors should exercise caution in the current market environment.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody's. The Motley Fool has a disclosure policy.