The financial markets have continued to be volatile in the week and a half since the U.S./Israeli strikes on Iran. Oil prices have swung the widest, and while still up 25-30% since the conflict began, had been briefly up more than twice that at the start of week #2.
Stocks have been choppy also. The U.S. has held up relatively well, with the S&P down 1.3% over the seven trading days, now off 0.7% year-to-date. Non-U.S. stocks, led by losses in oil-dependent Asia, have declined by 6.1%, while remaining up 5.6% year-to-date.
Bonds have been pressured by worries around possibly higher inflation and interest rates driven by rising energy costs, the AGG index trimming its year-to-date gain by 1.0%, to 0.9% today.
Thayer portfolios have been moderately impacted, generally shedding about 2% since the conflict’s start, while still maintaining modest gains year-to-date.
For investors, the war clearly has raised levels of uncertainty, which typically has a negative impact on asset prices. Oil directly reflects what might be the war’s most central issue: the near and longer-term utility of the Strait of Hormuz, the Persian Gulf’s only water passage, through which 20% of the world’s daily supply normally travels. So far, we’ve seen tanker traffic slow dramatically (by one account, a typical rate of 60 ships in a day reduced to just one), as non-Iranian vessels fear harassment or worse.
If Iran can continue to disrupt the Strait, creating enough resistance of U.S.-led efforts to restore order, they could succeed in undermining both the world economy and U.S. prospects for winning the war. If the U.S. ups its naval presence, seeking perhaps to control shipping traffic and/or take over the Gulf’s Kharg Island, Iran’s main oil export hub, the war could turn into a much more direct and costly conflict. Clearly, this could escalate to quite a bit more than the impacts of Iran’s drone strikes on U.S. bases and neighboring countries we’ve seen to date.
One possible action to ease the oil supply crunch is a tapping of oil reserves among the G7 nations – U.S., U.K., France, Germany, Italy, Japan and Canada – which would be an unprecedented step. The amounts considered, between 300 and 400 million barrels, could provide relief for presumably a few weeks. The International Energy Agency is coordinating discussions and plans as this is written.
The installation of Ali Khamenei’s son, Mujtaba, as the new supreme leader may indicate a low likelihood that Iran will cooperate on Gulf oil and gas operations, as well as a political transition and wind-down of the war. Mujtaba is not likely to emerge as a more moderate leader, and lost both parents, his wife, a son and a sister in the initial strikes. He’d of course be a target, but also might stay completely underground.
In this uncertain environment, we continue to counsel taking the longer view and maintaining current allocations. Portfolios have defensive elements, with a shorter than market bond mix (thus relatively protected if rates rise), as well as a moderately sized hedged position within the well-diversified equity book.
We will of course be back as events dictate.
David Beckwith, CIO
Iran War and Markets
The financial markets have continued to be volatile in the week and a half since the U.S./Israeli strikes on Iran. Oil prices have swung the widest, and while still up 25-30% since the conflict began, had been briefly up more than twice that at the start of week #2.
Stocks have been choppy also. The U.S. has held up relatively well, with the S&P down 1.3% over the seven trading days, now off 0.7% year-to-date. Non-U.S. stocks, led by losses in oil-dependent Asia, have declined by 6.1%, while remaining up 5.6% year-to-date.
Bonds have been pressured by worries around possibly higher inflation and interest rates driven by rising energy costs, the AGG index trimming its year-to-date gain by 1.0%, to 0.9% today.
Thayer portfolios have been moderately impacted, generally shedding about 2% since the conflict’s start, while still maintaining modest gains year-to-date.
For investors, the war clearly has raised levels of uncertainty, which typically has a negative impact on asset prices. Oil directly reflects what might be the war’s most central issue: the near and longer-term utility of the Strait of Hormuz, the Persian Gulf’s only water passage, through which 20% of the world’s daily supply normally travels. So far, we’ve seen tanker traffic slow dramatically (by one account, a typical rate of 60 ships in a day reduced to just one), as non-Iranian vessels fear harassment or worse.
If Iran can continue to disrupt the Strait, creating enough resistance of U.S.-led efforts to restore order, they could succeed in undermining both the world economy and U.S. prospects for winning the war. If the U.S. ups its naval presence, seeking perhaps to control shipping traffic and/or take over the Gulf’s Kharg Island, Iran’s main oil export hub, the war could turn into a much more direct and costly conflict. Clearly, this could escalate to quite a bit more than the impacts of Iran’s drone strikes on U.S. bases and neighboring countries we’ve seen to date.
One possible action to ease the oil supply crunch is a tapping of oil reserves among the G7 nations – U.S., U.K., France, Germany, Italy, Japan and Canada – which would be an unprecedented step. The amounts considered, between 300 and 400 million barrels, could provide relief for presumably a few weeks. The International Energy Agency is coordinating discussions and plans as this is written.
The installation of Ali Khamenei’s son, Mujtaba, as the new supreme leader may indicate a low likelihood that Iran will cooperate on Gulf oil and gas operations, as well as a political transition and wind-down of the war. Mujtaba is not likely to emerge as a more moderate leader, and lost both parents, his wife, a son and a sister in the initial strikes. He’d of course be a target, but also might stay completely underground.
In this uncertain environment, we continue to counsel taking the longer view and maintaining current allocations. Portfolios have defensive elements, with a shorter than market bond mix (thus relatively protected if rates rise), as well as a moderately sized hedged position within the well-diversified equity book.
We will of course be back as events dictate.
David Beckwith, CIO