An offshore oil and gas platform in Seal Beach, Calif., on Tuesday.Justin Sullivan/Getty Images
Murray Leith serves as chief investment officer at Vancouver-based Odlum Brown.
Wide-leg trousers are back. Apparently, so is stagflation – the unpleasant combination of weak economic growth combined with rising prices, as the Iran war oil shock continues.
A comparison to the 1970s feels appropriate. That decade, which faced similar oil shocks from Middle East wars, saw U.S. inflation peak near 15 per cent, eventually forcing the Federal Reserve to raise interest rates to 20 per cent, and stock valuations to collapse to single digits. Canada’s situation was similar. It was a genuine disaster for investors.
But while “stagflation” carries an emotional punch, the conditions that made the 1970s so destructive were specific and self‑reinforcing. Comparing those forces to today suggests a far less frightening picture.
Opinion: In Iran oil shock, Canada talks big but is useless to our allies
Housing is the first key difference. Homes were more affordable in the 1970s. As inflation took hold, higher home values boosted consumer confidence, supported spending and encouraged workers to demand higher wages, all of which intensified the inflation spiral.
Today’s starting point is the opposite. Home prices are at or near historic highs. Consumers, already stretched, are less able to bid home prices significantly higher. Moreover, the largest single component of the CPI – owners’ equivalent rent – has been decelerating for months. Because official inflation tends to lag actual market rents, further slowing is already baked in. Instead of amplifying inflation, the housing sector today is leaning in the opposite direction.
Energy is another distinction. The 1970s oil shocks were driven by war but also by a specific action amid the conflicts of the time: a co-ordinated predecessor to the OPEC cartel, known as the “Seven Sisters,” that controlled more than half of the world’s supply and wielded that power intentionally for geopolitical leverage. That resulted in a sustained restriction of supply that kept energy prices elevated for years.
Today’s disruptions, while real, are far less entrenched. Iran’s actions in the Strait of Hormuz stem from an immediate threat rather than a deliberate, long-term strategy. Unlike OPEC in the 1970s, Iran doesn’t dominate global supply, and it depends on the same shipping routes for its own oil revenues.
Countries such as China, which purchase most of Iran’s crude, have strong incentives to see this dispute resolved quickly. Meanwhile, U.S. shale producers can ramp up output to meet a supply gap much faster than traditional producers could 50 years ago.
A third major difference is technology. Artificial intelligence, automation and software are reshaping the cost structure of much of the economy, and its broad direction is disinflationary. The 1970s industrial economy had no such offset; its heavy energy dependence meant that oil shocks amplified costs everywhere.
Technology, which deflates costs at the aggregate level, can simultaneously displace workers, and that creates its own pressures, including widening inequality and social strain. That is a serious long-term problem, but different from stagflation.
This is not to say all inflationary pressures are absent. Government debts are huge and expanding, and deficit spending tends to push prices upward. Tariffs that restrict global trade increase the cost of goods and reduce competitive forces that normally limit price rises. Tighter immigration restricts labour supply, pushing wages and production costs higher. These are real, inflationary pressures that deserve attention. But the conditions that turned a temporary shock into a decade of misery are largely not present today.
Things could still go wrong. A significant drawdown could occur at any time, for reasons that have nothing to do with Iran or inflation. What history is unambiguous about is that drawdowns are a permanent feature of investing, and that those who try to time their way around them typically fare worse than those who don’t.
Why Canada’s energy superpower status can’t fully protect us from the oil crisis
For long-term investors, the more useful consideration is not which macro scenario unfolds, but whether the businesses they own can earn, adapt and compound through a difficult environment. Companies with real pricing power fared far better during the 1970s than headline market performance suggests. Their valuations were compressed in the short term, but because they could protect earnings, they generated strong long-term returns.
Most investors find it difficult to hold still when headlines are alarming. The word “stagflation” is among the most feared in the financial vocabulary, and right now it is everywhere.
That creates a real opportunity for those who can keep their heads. Wealth is built and protected not just in absolute terms but relative ones. Those who resist the pull of the crowd at moments like this, who stay invested in quality businesses and avoid the costly mistake of trying to time the market, tend to emerge from difficult periods in a stronger position than others.
That gap isn’t luck; it’s the reward for discipline applied consistently over time.