The Iran war has led to a dramatic spike in oil prices, pushing up our expectations for inflation and worsening economic growth prospects. At the time of writing, market expectations for interest rate cuts in the UK and US this year have faded – although forecasts are changing day by day. Bond yields have risen, pushing prices lower. And stock markets have suffered.
So far, the pullback in stock markets has been relatively modest, with the US markets off less than 10%. Perhaps investors are being complacent. Perhaps they’re expecting another TACO trade – Trump Always Chickens Out – something we’ve seen a few times when his policies rattle markets.
However, the path to resolution is far from obvious in the conflict with Iran. A survey of economists suggests that the oil price would have to exceed $138 for the probability of a recession to top 50%.
In 1973, a quadrupling of the oil price triggered dire market returns – and a decade of economic malaise. We take some comfort that the economies of the developed world are less oil dependent than half a century ago. But we’d still expect that a significant and sustained rise in prices could impact economic growth.
This article isn’t personal advice. All investments fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future. If you’re not sure what’s right for you, ask for financial advice.
Oil is not the only risk
The 21st Global Risks Perception Survey from the World Economic Forum puts the current conflict into a wider perspective. It captured the views of over 1,000 leaders across academia, business, government, international organisations and civil society back in September. It places the long list of potential threats in five categories.
Geopolitical risk
Not surprisingly, geopolitics topped the list of concerns – even before the Iran war. Beyond military conflict, President Trump’s imposition of tariffs is a form of geoeconomic confrontation, threatening global trade, supply chains and investment flows. Investors face increased policy uncertainty.
Environmental risk
Over the long term, half of the top ten risks in the survey are environmental in nature. Climate-related risks threaten physical infrastructure and food supplies – and, therefore, economic resilience.
Societal risk
Increased political polarisation is weakening trust in institutions. This makes it more challenging to reach consensus on unpopular policy choices when they are needed.
Technological risk
The potential negative consequences of artificial intelligence (AI) adoption was among the fastest rising concerns among participants. There’s growing anxiety about its impact on the labour market. And cyber security is an ongoing threat to individuals, businesses and governments.
Economic risk
The final risk for survey participants is arguably the top risk for investors in the immediate future – an economic downturn. We see many of the risks above as having the potential to trigger a recession.
Investing = risk-taking
Investing is all about taking – and managing – risks. Investors in the stock market expect a return above cash as a reward for taking on this risk. We encourage our clients to take a long-term view when investing so they can ride through the inevitable downturns in markets when these risks are realised. Today, a recession may be a possibility. But, if a downturn occurs, an eventual economic recovery is an inevitability – and so too is an associated stock market rally.
Do macro shocks matter?
A recent study by the US’s National Bureau of Economic Research found that the probability of macro shocks altering the course of the economy over the long term was less than one percent. They concluded that “what really moves the macroeconomy and demands attention is policy, not shocks.”
This is not to say that recessions do not matter for investors. They inevitably lead to downturns in stock markets. But recessions are hard to predict. And the fall in stock markets typically starts long before the recession is confirmed by economic data.
Trying to time markets – by aiming to sell before big falls - is notoriously challenging. Therefore, investors should try to ignore the daily volatility – tough as that may be – ensure they are well-diversified and stick with their long-term investment strategy through these market shocks.