Investors on Monday were reminded the Iran war is still going, with stocks sagging as oil prices and bond yields spiked after the US and Iran traded fire for the first time in weeks.
Brent oil cruised back above $90 a barrel and US crude topped $85 following weekend strikes by the US on Iranian targets, and retaliatory attacks by Iran on US bases in the region.
It’s a familiar routine at this point for investors, with stocks on a roller coaster ride this summer as start-stop negotiations often give way to fresh tensions that ripple through markets.
It’s also a stark reminder that the longer oil prices remain elevated, the greater the risk to the market’s main drivers of gains.
With oil prices stuck at elevated levels, risks are rising for certain segments of the market like airlines, consumer-facing companies in the retail space, and manufacturers. The persistent energy crunch also adds a new wrinkle to the inflation outlook, which threatens the market with higher interest rates from the Fed.
“Persistently high gas prices are a key channel through which the conflict could still feed inflation, even as headline oil volatility fades,” said Jason Pride, chief of investment strategy and research at Glenmede. “Investors will be watching closely for signs that this feeds through to broader-based inflation.”
The first military action in the Persian Gulf in weeks throws the conflict back into focus as the market heads into a historically weak stretch of the year. The August to October period has long been the worst three-month stretch for stocks, and the immediate effect of high oil prices on companies’ bottom lines, combined with their inflationary impacts, represent a headwind ahead of the coming earnings season.
Shortly before the latest strikes, Trump announced that the US would take partial control of Venezuela’s oil reserves. Yet, Monday’s price action shows that the market is still focused primarily on the Iran conflict rather than the possibility that prices could be tamped down by more supply from Venezuela.
Chris Versace, senior portfolio manager at TheStreet Pro, noted that it will take time for any new oil reserves to counterbalance the disruption to flows through the Strait of Hormuz, predicting that oil-linked volatility will persist.
“We may get some reprieve subject to what is announced between the White House and oil executives but the reality is any impact will come later,” he told Business Insider. “ISM data and what it says on inflation will be important.”
Other market pros see risks growing for certain corners of the market if the energy disruptions persist. Simon Lack, a portfolio manager at Catalyst Energy Infrastructure Fund, highlighted America’s status as a major net exporter as a potential cushion against oil-driven volatility, but added that one of the market’s hottest trades is threatened by prolonged conflict.
“I’d say the biggest threat is to the AI-related names because higher oil is pushing up bond yields,” he said. “This increases the discount rate used to value the future cashflows of these high growth companies, depressing their net asset value and stock price.”
