From the editor...
It certainly wasn’t a case of “buy on the sound of cannons”. But markets’ reaction to Iran’s first direct attack on Israel, which raised the spectre of “the first full-scale regional war in the Middle East in decades”, according to Tina Fordham of Fordham Global Foresight, was relatively sanguine. America’s S&P 500 sold off sharply last Friday in anticipation of the strike, losing around 2%, and slid marginally on Monday after an uptick; oil prices, a gauge of geopolitical trouble, fell slightly.
Markets have learnt to deal with political jitters. A Deutsche Bank note out this week examined the S&P 500’s reaction to previous political shocks, starting with Germany’s annexation of Czechoslovakia in 1939. Subsequent flare-ups included the Cuban missile crisis; the Arab-Israeli war of 1973; the 9/11 attacks; the Arab Spring; and Russia’s invasion of Ukraine.
Encouraging precedents
The median sell-off was 6.3%, while the median gain a year from the bottom of the initial dip was 13.5%. For all the sound and fury – and flood of press releases saying “diffuse” when they mean “defuse” – nothing much changes for long-term investors. There is always a risk of major escalation; after all, “when people make diplomatic points by firing missiles at each other, the risk of an accident grows that much greater”, as John Authers points out on Bloomberg. Markets have set aside this scenario, because there would be little point in worrying about share prices if that happens.
Cris delves more deeply into the psychology of markets confronted with political turmoil in our Investment Strategy section (see page 18). For now, the key takeaway is that any further political turbulence in the Middle East would tend to reinforce the trends we have been worrying about in any case.
Disruptions to trade and higher oil prices are inflationary, and would give stubbornly resilient inflation an extra fillip. A 10% increase in oil prices adds between 0.1% and 0.2% to headline inflation in advanced economies, according to Capital Economics. This won’t change a great deal, as the prevailing narrative is one of interest rates “higher for longer” anyway (see page 4); the latest British inflation figures play into the theme (see page 15).
Keep in mind the scope for knock-on effects reinforcing the trend too. The US dollar has already strengthened to a one-year high in trade-weighted terms as expectations of US interest-rate reductions have been reined in rapidly. That in turn implies higher import prices in the eurozone, the one region where inflation has been comparatively quiescent.
All this presages further record highs for gold. The Pure Gold Company, which sells coins and bars, said on Monday that it had seen a 711% jump in demand for physical gold and silver in a week as rattled investors rushed to stock up. Hold 10% of your portfolio in gold, and have some exposure to energy: see Max’s analysis on page 22.
It’s also always worth keeping an eye out for compelling long-term investment themes to temper the gloom. Enter Matthew’s cover story on page 24: a medical miracle is about as compelling as it gets. Finally, I would like to draw your attention to our new series of Readers’ Choice Awards to help us find the top providers of investing, saving and banking products. Please do participate in the survey at MoneyWeek.com/awards.
“Disruptions to trade and higher oil prices would give stubborn in ation an extra llip”