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The recent escalation of tension between the US and Iran, has created short term volatility on global risk assets, primarily equities. First and foremost, we hope for a quick and peaceful resolution to this situation. In the meantime, we felt you could benefit from some of our thoughts.
Other than selling pressure on equities, another immediate market impact will be on commodity prices throughout the energy complex. Any disruption in production or supply, whether real or perceived, will put upward pressure on the price of oil. While this response in price is logical, we should keep in mind that any disruption in supply from Iran can be quickly offset by other major producing countries such as the United States, Russia, and Saudi Arabia. This in turn should offset any longer term inflationary worries regarding the price of oil.
The longer the tension continues at this elevated level, the more investor sentiment will wane. This has important implications, not only for equity prices, but also economic growth. While we do look for continued economic expansion, a negative change in sentiment could cause us to revisit our outlook.
On the positive side, “safe haven” assets such as US Treasuries and Gold for example, usually benefit in the short run. This is one of the primary reasons we continue to advocate for clients to maintain diversified portfolios and protection strategies to mitigate these short term issues that are primarily out of investor’s control.
Geopolitical events are almost impossible to forecast and trade. 20 days after Iraq invaded Kuwait, S&P 500 was down 9%, but 20 days after the 9/11 attacks, S&P 500 was up 5%, and 20 days after Japan bombed Pearl Harbor, S&P 500 was up 0.3%.
History has shown that financial markets rebound quickly from any short-term losses caused by the anxiety and political uncertainty. Usually political events roil the markets, but have no discernable impact after a few weeks or months.
The U.S. stock market is currently not responding to the recent escalation with Iran and threat of war in any meaningful way, which is not atypical based on similar political crises in the past. A study of the 20 geopolitical market shock events in history shows that S&P 500 declined by only 5% on average from peak to trough over a 22-day period, and recovered back to the pre-crises levels over the following 47 days.
For now, the advice we are giving to you, our clients, is to stay the course. We realize that we have been writing and saying this throughout a few tenuous times over the past few years, but so far so good! The overall longer term economic data continues to be favorable for global economic expansion. Here in the US, we have strong employment, low inflation, accommodative interest rates, and an economy that continues to point to expansion. We do not believe at this time, that these events will lead to a long term conflict in the Middle East. That obviously would be in no one’s best interest! However, if this view were to change and the economy started to show signs of contracting, we would re-evaluate our allocations.
As always, if you have any questions, please feel free to reach out to any member of your Beacon team.