During the Napoleonic Wars, Baron Nathan Rothschild was said to have said, “Buy to the sound of cannons and sell to the sound of trumpets.” However, he probably didn’t say that.
That’s kind of what oil traders did on Tuesday. The light sweet crude contract went from around $67 a barrel when news reports said Iran was going to fire rockets at Israel to as high as $71.80 a barrel when Iran’s UN mission said it was done for the day.
But the U.S. stock market did not enjoy the ride. At its worst, the S&P 500 index SPX -0.93% fell 1.4% after Iran fired hundreds of ballistic missiles into Israel, which made people worry that rising bloodshed in the Middle East could cut off oil supplies.
In a social media thread, Adam Kobeissi of the Kobeissi Letter broke down how stocks did during wars. He says that the first reaction of the stock market is not good, based on statistics from LPL Financial. The average drop in the S&P 500 SPX -0.93% due to these big events is 8.2%.
Now that we look more closely, the most important thing is whether the country is in a recession or not. He says that when a war starts outside of a recession, the economy gains 9.2% on average each year and loses 11.5% on average each year when a war starts during a recession. The Atlanta Fed’s GDPNow predicts growth of 2.5% in the third quarter, so it’s not likely that the U.S. is in a recession right now.
Looking at an even broader range of geopolitical events and stock-market reactions, the market bottom typically takes 22 days, with a recovery time of 47 days.
Of course, Middle East unrest is just one input into a whole host of unknowns right now, that include the economy, interest rates, a U.S. port strike and an election. “Sum this all up and you have a very dynamic situation which largely depends on recession outlook,” he says. “Markets that have many different moving parts almost always come with severe volatility.”
