The stock market has fallen 2-3% since conflict broke out in the Middle East two weeks ago.
Following geopolitical crises, the market tends fall for 15 days. On average, it then recovers fully over the following 30 days.
The market has become oversold, which has historically led to rallies of 5-8% over the following three months.
Given this history, I am optimistic that the market can recover towards the end of the year. Geopolitical crises usually create buying opportunities, and should be ignored by long-term investors.
There are two main risks to this view:
1. If conflict in the Middle East escalates, oil prices may surge, which could lead higher inflation, higher interest rates and a recession.
2. Interest rates still seem not to have found a durable ceiling.
On the latter point, the US 10-year interest rate breached the 5% threshold for the first time in more than 15 years today. Only two years ago, the 10-year rate was at 1.4% and today’s levels could hardly have been imagined.
Like stocks, bonds now look oversold. My base case is that yields should fall back towards 4.5% over the following weeks.
There is a case to be made, though, that even higher yields may be reached in 2024, when the Fed may find its fight against inflation is not yet over. If that happens, US interest rates may have to go as high as 6.5%. This could lead the 10-year rising to 5.5%-6% and the $SPX500 falling to 3500. Because of this scenario, I would not be a buyer of bonds yet. It is more of a 2024 story, however, in my view.
Barclays was sold, Credicorp bought.