NEW YORK: The US stock market has now nudged above where it was when the Iran war began over six weeks ago, which investors say is a reflection of bets that the conflict will not be long-lasting.
But what if that thinking is wrong? The benchmark S&P 500’s round trip comes despite a sharply different investing backdrop compared with Feb 27, just before the US-Israeli military strikes began the Middle East conflict.
Oil prices are some 40% higher. Concerns about inflation have driven up benchmark treasury yields. Those same concerns have led markets to largely rule out previously anticipated interest rate cuts this year.
All of those factors could present obstacles to stock performance, should they persist.
“There’s a lot of complacency that this can resolve itself fast. What’s priced in is that we have an off-ramp,” said Brad Conger, chief investment officer at Hirtle Callaghan, which oversees assets from endowments and foundations.
“I think we’re a lot worse off than Feb 27th, and we’re at the same price.”
Investors are seizing on what they see as a solid economic backdrop, in particular a strong outlook for corporate profits that has actually improved since the war began.
They are also mindful of the stock market’s resilience during this three-year-old bull market and wary of missing out on rallies.
The S&P 500 has rebounded after dropping in the initial weeks after the crisis began.
The index in late March closed down over 9% from its late-January all-time high, nearly reaching a 10% decline that would have indicated a correction.
The S&P 500 on Monday closed up 0.1% since the war began. After a sharp rally on Tuesday, the benchmark index was 1.3% above its pre-war level and on the cusp of a new record closing high.
Optimism about a resolution accelerated following a two-week ceasefire agreement reached last week.
But much about the situation remained uncertain and investors were still bracing for war-related developments to drive asset volatility.
The market was looking at “temporary risks which will be overcome in fairly short order, as opposed to being the start of a new regime of higher inflation, higher energy prices, higher interest rates,” said Peter Tuz, president of Chase Investment Counsel Corp.
“Because if that were the new regime, there is very little reason to believe the market would be as strong as it is right now.”
Central to the performance of the stock market is the movement in oil prices. Sustainably higher crude prices stand to pressure consumers who have to spend more on petrol, while also raising costs for businesses.
One sign that investors are expecting the war to wind down in the near term is markets showing that oil prices are expected to be more moderate by the end of the year, said Angelo Kourkafas, senior global investment strategist at Edward Jones.
The front-month contract for US crude is hovering at around US$92 a barrel, while the December contract is at $76, according to LSEG data.
“Markets are now seeing the energy disruption as something that is near-term,” Kourkafas said. “There is this notion that, yes, there is a lot of near-term disruption, but it is temporary in nature.
“And then once we go past that, we’re going to go back to the prevailing economic resilience that we had before.”
The rise in oil prices has already influenced US inflation, with the monthly Consumer Price Index rising in March by the most in nearly four years.
Inflationary fears have led investors to dial back expectations for Federal Reserve (Fed) rate cuts, which had been a source of optimism about US equities heading in to the year. — Reuters
