U.S.-Iran-Induced Market Pressure Is a Reaction. Stay Calm.

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The risk-off market on Friday seems mostly like a short-term reaction, and many on Wall Street are advising investors to march on as they’d planned.

Late Thursday, news broke that the U.S. military, at President Donald Trump’s direction, killed a top Iranian general, Qassem Soleimani, to protect U.S. personnel abroad.

The Pentagon said the general was "actively developing plans to attack American diplomats and service members in Iraq and throughout the region.”

On Friday the S&P 500 fell as much as 1%, then recouped half the loss by mid-afternoon. The other two major U.S. stock indexes also fell considerably.

Investors moved into safety, sending the 10-year treasury yield down to 1.8%. (Bond prices rise as yields fall.) Crude oil rose as much as 4% and settled at a 2.6% gain by mid-afternoon.

But “while some short-term volatility is almost certain, the actual effects, over time, will likely not be nearly be as bad as might be feared,” wrote Brad McMillan, chief investment officer of Commonwealth Financial Network, in a note.

“Geopolitical events by their nature are unpredictable, but previous periods of increased tensions suggest that the impact on wider markets tends to be short-lived, with more lasting effects confined to local markets and assets that are directly impacted by the tensions,” wrote UBS’s chief investment officer of global wealth management, Mark Haefele.

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One of the concerns prevailing on Friday is that a war — or at least skirmishes — between the two nations could destroy Iran’s oil supplies, specifically in the Persian Gulf, which would lift prices. Iran is one of the world’s largest oil producers. 

Exxon Mobil XOM and Chevron CVX both initially rose 1% before falling slightly. BP BP rose 2.2%. The prospect of higher fuel costs pushed down shares of airline stocks: American Airlines AAL, Delta Airlines DAL and Southwest Airlines LUV dropped 4.4%, 2.2% and 1.2%, respectively.

As for oil prices, many are quick to note that supply is expected to outstrip demand for the next year or so, with some of the world’s top players planning to produce high volumes of oil in the near future.

Even with a conflict between the U.S. and Iran, the added supply could outweigh the restricted supply resulting from conflicts.

“Don't expect a sustained oil price rally,” Haefele said, adding that oil-supply chains wouldn’t be disrupted and that OPEC and Russia have plenty of spare production capacity. "We still expect an oversupplied oil market in 2020.”

Additionally, “the major potential risk to oil markets is mitigated by the fact that the U.S. is now the largest producer of oil,” Commonwealth’s McMillan said.

The U.S. has been adding a tremendous amount of oil to the global market in the past few years and is expected to continue to do so. The U.S. averaged production of roughly 9.5 million barrels a day in 2017, a number that steadily rose to about 12.1 million in 2019, according to the Energy Information Agency. The U.S. is expected to produce about 13 million barrels a day in 2020.

“Crude-oil prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories,” the agency said in a report published in mid-December.

Oil has also enjoyed a rally of late, with the Brent Crude index up 19% since Oct. 3. Renewed optimism about economic growth took the price higher, as did an uptick in demand, according to a note from Morgan Stanley oil commodity and equity analysts.

If the above scenario continues longer term, fuel costs won’t rise, sparing stock prices that concern. Plus, Wall Street doesn’t seem worried that an all-out war could occur.