Stock Market Turmoil Over Tariffs and Oil Prices: 60 Years of History Show What Happens Next

It's been a tumultuous year for the United States stock market. The S&P 500 (SNPINDEX: ^GSPC) dropped 10.5% in the two days after President Trump unveiled his "Liberation Day" tariffs in early April, the fifth-largest two-day decline in history. That led to the third-largest weekly spike in the CBOE Volatility Index, commonly called Wall Street's "fear gauge."

Surprisingly, the S&P 500 rebounded shortly thereafter as encouraging inflation, jobs, and consumer spending data showed the resilience of the U.S. economy. Additionally, Trump paused the most severe tariffs for 90 days to allow time for trade negotiations, which caused several economists to lower their recession probability forecasts.

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However, the stock market recently hit another spot of turbulence when Israel attacked Iran, and tensions escalated further when the U.S. entered the conflict. Iran is one of the largest oil producers in the world, so investors are worried the conflict will lead to higher oil prices, which in turn could bring about a resurgence in inflation.

Iran is reportedly considering closing the Strait of Hormuz, a waterway that handles approximately 20% of global oil and natural gas flows. Experts are skeptical the Iranian government will follow through, but JPMorgan Chase says a blockage could drive oil prices to $120 per barrel and push U.S. inflation to 5%. For context, crude oil costs about $75 per barrel as of June 23, and inflation measured 2.4% in May.

Admittedly, the near-term outlook for the stock market is clouded by uncertainty, but six decades of history show what eventually happens next.

Tariffs and geopolitical tensions could sink the stock market in the near term

The tariffs imposed by President Trump have raised the average tax rate on U.S. imports to 12.4%, according to the nonprofit Tax Foundation. That is the highest level since 1941. But the abrupt hike is yet to be reflected in economic data because many companies stockpiled inventory ahead of the tariffs, leading to a record trade deficit in the first quarter.

However, surveys suggest most companies will pass cost increases down the supply chain, so consumers will likely bear the largest burden. That means inflation will probably reaccelerate in the coming months. As a result, many experts have downwardly revised their economic growth forecasts. The pre-tariff consensus said U.S. GDP would increase 2.1% in 2025, but the post-tariff consensus says 1.4%, according to the Federal Reserve.

Additionally, falling gasoline prices have been instrumental in suppressing inflation this year, but that trend could reverse as the conflict in the Middle East unfolds. Geopolitical tensions add another layer of uncertainty to an already precarious market environment. Any sign of a sustained increase in inflation or unemployment would almost certainly cause the stock market to sink, perhaps substantially.

Image source: Getty Images.

Six decades of history says the stock market is headed higher in the long term

The Standard Statistics Company introduced the Composite Stock Index in 1926. Initially, it tracked 90 stocks, but more securities were added in subsequent years until the number of member companies reached 500 in March 1957. The index was then renamed the S&P 500.

That means the S&P 500 has existed in its current format for more than six decades. To be clear, stocks have been added and deleted during quarterly rebalancing events, so the member companies have changed over the years. But the selection methodology and overall structure have been consistent since 1957.

Here are the two most important things investors can learn from those six-plus decades of historical data:

• The S&P 500 has always increased in value over every rolling 20-year period, meaning anyone who held an S&P 500 index fund for at least 20 years made money, regardless of when they made the initial purchase.
• Inclusive of dividends, the S&P 500 has returned more than 13,000% since its inception, which is equates to 10.5% annually. It achieved those returns despite 10 recessions, 11 bear markets, and 25 corrections.

Importantly, the last six-plus decades encompassed a wide range of economic and market conditions, so investors can be reasonably sure the S&P 500 will produce similar returns in the future. That does not mean the index will increase 10.5% every year, but rather that the annualized return will be approximately 10.5% over long time periods. That means patient investors can buy and hold quality stocks with confidence, even in the current environment.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.