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