On Thursday evening, Iran’s top security and intelligence commander, General Qassim Suleimani, was killed in a drone strike at Baghdad International Airport. The strike, which was authorized by US President Donald Trump, represents a potentially dangerous escalation in the growing confrontation between the US and Iran.
How are the markets responding?
Markets reacted quickly to Suleimani’s death. In the hours following the strike, the S&P 500 Index fell roughly 1%, while US Treasury rates are trending lower.1 Meanwhile, safe-haven currencies such as the Japanese yen and assets such as gold are rallying, and oil prices climbed by more than 4%.1
How should investors view the ongoing events?
Short-term market volatility is almost entirely driven by policy uncertainty and/or geopolitical uncertainty. This time will likely be no different. We expect that uncertainty may persist in the near term as markets await potential retaliation from Iran and disruption in the global oil markets.
However, as the charts represent, market returns have tended to be, on average, positive in the 12 months following spikes in the Geopolitical Risk Index.
Do the ongoing events change the larger business and market cycle narrative?
As always, investors should assess geopolitical events as to the extent that they change the overarching market narrative. This is unlikely to be the case, but we do want to follow business sentiment closely given that Iran has promised “harsh retaliation” that some experts believe could come in the form of cyberattacks on US businesses.
It is important to note that the US is energy-independent, and so the ramifications of heightened conflict in the Middle East on the US vis a vis energy is far less than it would be just two decades ago.
Historically, regional geopolitical happenings are not the events that end business and market cycles. As an example, Iran’s bombing of the Saudi oil fields in 2019 led to short-term market volatility, in a year in which markets reached record highs.
The larger market narrative of slow growth, benign inflation globally, generally accommodative monetary policy globally, and equities still attractive relative to bonds, has not changed. In our opinion, the backdrop for equities and other risk assets remains favorable.
Blog header image: Rasoul Ali / Getty Images
1 Source: CNN Business, “Oil prices surge 4% after Iran military leader killed in drone strike,” Jan. 3, 2020
Past performance is no guarantee of future results.
All investing involves risk, including risk of loss.
The opinions referenced above are those of the author as of Jan. 3, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.