OIL prices surged 30% last week and swathes of global stocks sold off as war in the Middle East escalated, yet an air of complacency hung over Wall Street.
Investors have likely been betting that the turmoil will have a short-lived, mild economic impact, much like most crises in the recent past. Is this an efficient market at work, or wishful thinking? We’ll soon find out.
West Texas Intermediate crude rose 35% last week, the biggest weekly rise since the US oil benchmark futures were launched in 1983, yet the S&P 500 fell only 2%. The Nasdaq dipped just over 1%.
What gives?
Some investors may believe the United States is better positioned to handle an energy shock than many of its peers because it is a net energy exporter.
A lingering belief that “US exceptionalism” is alive and well could also be at play. It’s also notoriously difficult to price geopolitical risk, so many asset managers may simply be sitting on their hands and waiting for more clarity, particularly those reluctant to let go of their “fundamentally” bullish outlook on corporate America.
Whatever the root, there is a danger that this is misplaced optimism at best, or reckless complacency at worst.
Consider this. In the first 41 trading days of 2026, the S&P 500’s trading range, as measured by the difference between the highest and lowest daily closing prices, was just 2.7%, according to The Kobbeissi Letter, a global markets newsletter.
That’s the narrowest range for that period on record, going back to 1928. But this will now be tested.
Oil is on track for one of its biggest daily gains in decades, with both Brent and WTI soaring above US$100 per barrel on Monday.
Prices were up more than 25% at one point during Asian trading hours, though they have retreated slightly.
Other countries’ stock markets have been rocked. Benchmark European, Asian and emerging market indices, which fell 5% to 7% last week, are putting up more big losses.
Japan’s Nikkei was down another 5% yesterday, with South Korea’s benchmark index falling even further.
Granted, many of these countries are net energy importers, meaning they are more exposed to the historic spikes in oil and natural gas prices than the United States.
Japan, for example, imports 90% of its energy, with 95% of its oil imports coming from the Middle East.
But can Wall Street remain an outlier?
Will history repeat itself?
From a US macroeconomic perspective, the Middle East conflict couldn’t be more ill-timed.
Inflation was already running at 3%, well above the Federal Reserve’s (Fed) 2% target and creeping higher, and payrolls data last Friday showed that the US economy lost 92,000 jobs in February.
The whiff of stagflation is growing stronger, and Fed officials can only hold their noses for so long. Chair Jerome Powell, and his likely successor Kevin Warsh, may be damned by Wall Street – or, more likely, bond investors – if they risk letting inflation get out of control by taking a dovish stance moving forward. But they also risk angering markets if they take a hawkish, anti-growth position that prioritises price stability.
Yet, policy paralysis can’t be good either. Investors appear to be banking that history repeats itself. In recent decades, most bouts of global geopolitical turmoil have sparked a few weeks of mild volatility, then a quick recovery, leaving everyone wondering what all the fuss was about.
Research by Parag Thatte and Binky Chadha at Deutsche Bank shows that geopolitical shocks have had an average negative impact of around 6% to 8% on US equities over the subsequent three-week period, with markets recovering those losses within another three weeks.
Larry Adam, chief investment officer at Raymond James, notes that since the 1990s, the S&P 500 has been higher on average one, three, six and 12 months after geopolitical shocks.
JPMorgan analysts said the typical scenario around a major geopolitical event is a 5% to 6% drawdown in stocks, which is then clawed back within a few weeks.
“There is a tendency among macro strategists to dismiss geopolitics and oversimplify the response: just buy the dip,” they wrote last Friday, adding that this rule of thumb has been true approximately 80% of the time over the past 60 years.
“We think the current episode with the Iran invasion is indeed a buy-the-dip scenario,” they added.
Yet, the drawdowns appear to be getting shallower, and as of last Friday, there was barely a dip to buy. Are markets getting smarter and better able to look through headline noise now that computers are doing the trading?
Maybe the playbook of past crises still applies. Or, has complacency set in, and it really is different this time?
The jury is still out, but Wall Street futures are down early on Monday. So a verdict may be imminent. — Reuters
Jamie McGeever is a columnist for Reuters. The views expressed here are the writer’s own.
