The Bigger Picture - October 2026

They say that history doesn’t repeat itself, but it does tend to rhyme.  

In October 1973, Arab oil producers imposed an embargo that turned a regional war into a decade-long case study of all the reasons stagflation is so despised by governments, consumers and investors alike. Fifty-three years later, the echoes are hard to ignore. 

Brent crude is hovering close to US$100 a barrel, with Strait of Hormuz traffic still well below levels before the Iran war began. The US Treasury hasn’t been able to ride to the rescue, as markets are doing what they always do: demanding higher compensation for rising risk. In recognition of this reality, the Fed recently raised rates for the first time since 2023. Chair Kevin Warsh warned that ‘inflation is too high and has been for too long’.  

Closer to home, the RBA’s fourth hike of the year has taken the cash rate to 4.6%, and IG expects up to eight central banks in the G10 to tighten by year-end. 

Rising yields have evolved into the main theme driving markets right now. 

Which brings us to an important question: are we witnessing a replay of 1973?  

The Wrecking Ball of ’70s Stagflation 

Looking back, the 1970s were brutal for balanced portfolios.  

The All Ordinaries fell 59.8% from its peak to its September 1974 low, or 67% after inflation. It was the deepest crash in real terms in Australian market history. That occurred just before inflation peaked at 17.7%, during a decade when the Australian economy suffered eleven quarters of negative real GDP growth.  

It was a tough time for investors. 

Across the eight major US inflation surges since the 1920s, including those of the ’70s, shares, nominal bonds and 60/40 portfolios delivered negative real returns on average. 

Before you curl up in the foetal position, there’s some good news.  

Firstly, there were a couple of ports in those inflationary storms: commodities and trend-following strategies delivered positive returns in each and every episode. That’s useful intel at this juncture. 

Secondly, today’s global economy uses more than 70% less oil per dollar of output than during the ’70s. Independent central banks are themselves a lesson learned from that decade.  

That means that this year’s higher oil price is doing less damage than it would have back then. 

With that said, there’s another warning sign that’s flashing just as red as it did during the ’70s: consumer expectations.  

Australian consumers now expect inflation of 4.9%, slightly higher than a year ago. 

That’s a problem because it was entrenched expectations of rising prices in the ’70s, rather than the higher oil price per se, that allowed stagflation to do its worst. 

The issue was, and is, that inflation is really a story about spending relative to output. Spending, in turn, is largely driven by the entrenchment of future price expectations and how that affects present-day behaviour. 

The upshot is that with Australia’s trimmed-mean inflation sitting at 3.6% for two straight months, investors need to understand, more than in recent years, how inflation impacts the main asset classes, including cash.  

For example, a term deposit that’s paying 5% is currently earning only 1.4% p.a. in real terms. That’s before tax. After tax at a 32% marginal rate, it falls to 3.4%, below the rate of inflation. 

As Deborah Meaden puts it, holding cash while inflation outpaces your after-tax interest rate means ‘you’re deciding to allow your money to lose its value’. 

The 5% Line in the Sand 

Global bond markets have delivered their own verdict on the direction of travel.  

The US 10-year Treasury yield recently exceeded 5%, its highest level since 2007, while Australian 10-year yields hit 5.4%, their highest since 2011.  

The global tightening cycle is accelerating. 

The Iran war isn’t helping. The US 10-year Treasury yield has climbed 0.85 percentage points since the war began, at a time when the US Government can ill afford a 5%+ yield on its US$40 trillion debt mountain. 

History suggests yields could rise even further from here.  

During tightening cycles since 1963, yields have typically risen a further 110 basis points in the year after the Fed’s first hike.  

Even Washington’s long-bond buybacks have failed to curb this rising yield tide. We should probably expect a more dramatic response from the US Treasury in acknowledgement of its increasingly untenable position.  

The silver lining is that the market backdrop has improved for bond investors looking to invest fresh capital.  

A bond fund yielding 5% with six years’ duration can absorb a 0.8 percentage point rise in yields before a full year’s income is wiped out. While the risk of losing a year’s income isn’t exactly comforting, it provides a cushion that bond investors haven’t had for many years. 

Repay Your Mortgage While Still Honouring Your Investment Plan 

The 1970s evidence argues against an all-in bet on gold or energy, despite how intuitive that may feel right now.  

The more resilient approach is to ensure you have deliberately sized exposure to a diverse range of strategies positioned to hold up with stagflation or without it: commodities, trend-following strategies, inflation-aware strategies, CPI-linked global infrastructure and floating-rate bonds. Each tends to benefit from rising income when inflation and rates rise. 

Against this backdrop, household financial decisions, such as whether to repay your mortgage or to keep investing, have rarely been more important. 

It’s currently a close call. 

With variable mortgage rates averaging 6.9%, every extra dollar paid off a home loan earns a guaranteed return equivalent to a 10.1% pre-tax return for someone on a 32% marginal rate (including the Medicare levy). That’s higher than the 9% p.a. Australian equities have returned over the past 30 years.  

That means borrowers are now more incentivised to pay off their mortgage than they have been for many years.  

But equally, the evidence is clear that successful investors keep investing through up and down markets.  

Regular, automated investing into diversified ETFs and funds is one of the most reliable strategies there is to compound your returns over the long term.  

So, a bit of both may be the best approach. 

Reducing your mortgage while still regularly investing, possibly in smaller increments that reflect your current disposable income, is a solid path towards a more secure financial future. 

Prepare for the Future, Don’t Predict It 

In hindsight, many of the worst 1970s outcomes belonged to those investors who sold near the 1974 low – when it was darkest just before the dawn. 

Nobody knows where oil or inflation is going next, but the most important investment decisions don’t depend on the accuracy of predictions. Is your cash earning a real return? Is your bond exposure paying enough for the associated duration risk? Would your next spare dollar work harder in your mortgage or a managed fund or ETF? 

A diversified portfolio created to generate real, after-tax returns doesn’t depend on being right about the future, only on staying invested through it. Fifty-three years on, that’s still 1973’s most potent lesson. 

Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.