We’re now into the third week of the Middle Eastern conflict, and events there continue to dominate the headlines. The Strait of Hormuz remains effectively shut to commercial shipping, oil prices are up over 60% year to date, and expectations for the end-date of the conflict have been pushed further out, according to the prediction market, Polymarket. Stock markets, though, have been remarkably calm under the circumstances. What explains this apparent disconnect between bad news and unpanicked stock markets?
Perhaps the two simplest reasons are that investors (in general) expect the conflict to end relatively soon, and oil market participants in particular expect prices to fall back before too long. Looking at oil futures, we can see that Brent Crude oil is expected to fall from around $100 a barrel today, to below $80 within a year’s time – higher than before the conflict, but not so high as to be damaging to the global economy. Investors and commodity traders, then, are ‘looking through’ this conflict to the other side.
By examining the history of financial markets, we can see that this type of pattern is not uncommon: stock markets often dip on the uncertainty caused by a war, crisis or shock…but later recover as uncertainty begins to clear. Occasionally, investors get worse outcomes (the 1973 Yom Kippur War being one example of this). We don’t know with any certainty what will happen this time, but we do know that ‘the market’ expects a resolution fairly soon.
Speaking yesterday with Max Thowless-Reeves at Blackwood Asset Management, Max made clear that he too expects a resolution to the conflict soon. However, Blackwood portfolios hold not just shares but also large amounts of cash and gold – assets that can quickly be put to work if stock markets should fall sharply and thus present good long-term buying opportunities. To me, this portfolio diversification and flexibility of mind seems like a good way to hedge the uncertainty.