So far, April has not been good for the stock market, which is now down almost 6% from its high at the end of March. The most significant factor weighing on markets appears to be the expanding conflict in the middle east. For many years my example for ‘unknown risks in the market’ went something like this. “Someday you may wake up and Israel has bombed Iran or Iran has bombed Israel and the world is a very different place.” Somewhat ironically both of these events took place this week. Of course, there was a reason that I used the Iran-Israel conflict as an example. Everyone knew that it could occur. The conflict has been brewing for decades.
Unfortunately, we do have many examples of wars in the middle east in recent history. Aside from the human tragedy that war involves, wars in the middle east impact the global economy and stock markets uniquely due to the region’s outsized contribution to global oil production. Thus, the traditional domino effect begins with a middle east war, which puts oil production at risk, which increases the price of oil, which increases production costs and transportation costs, which slows global economic growth and profitability. I would add that this war comes at a very vulnerable time, when inflation is already a problem and central banks around the world are trying to slow inflationary pressure.
If you are like me you have been watching the developments in the middle east with great interest. I have also been watching the price of oil for an indication of the risk to global stock markets. As of this writing, Crude Oil is at $83.73 a barrel, up about 20 percent since the beginning of the year, but still well within its trading range over the past year. I consider this good news and an indication that the market still believes that the war in the middle east will not expand. There is reason to believe this could be the case. Both Israel and Iran appear to be tight lipped about Israel’s counterstrike, appearing to downplay any damage in an attempt to deescalate the conflict between the two countries.
Stocks meanwhile, were mixed on Friday, indicating that we may be seeing a floor. If the uneasy standoff between Iran and Israel holds then we could get back to focusing on economic fundamentals, which while not stellar, continue to show a growing U.S. economy and moderating inflation. Let’s continue to pray for peace.