COLUMN - We are all aware of the war in Iran and the current blockades taking place in the Strait of Hormuz. The US began the assault on 28 February, and consequently, energy prices, especially oil prices, have skyrocketed.
To give these movements context, I found the chart below showing the oil price going back to 1985. Have a look at that spike right at the end – the spike occurred a couple of hours before the strike on Iran.
Due to uncertainty around what could happen, the oil price spiked to over $100 a barrel. Stock markets around the world plunged.
Higher oil prices mean higher input costs, and that leads to inflation. Higher inflation means pressure on consumers, and potential interest rate hikes from central banks, which put even more pressure on businesses.
It’s a whole domino effect.
What’s so fascinating about the stock market is that the current price reflects future expectations. Markets don’t react to past events, but to what participants think will happen next.
Have a look at the charts below showing the JSE All Share Index (our local stock market) and the MSCI World (a composite index representing the entire developed world, with about 70% of it being the US).
I marked two points on both charts that I want to focus on.
Chart: JSE All Share Index
Chart: MSCI World (developed world stock market)
The first point happened around this time last year and was triggered by Trump’s “Liberation Day” tariffs. Markets initially sold off sharply as investors tried to understand the impact of higher trade barriers on global growth, corporate earnings, and supply chains.
However, as more information came through and the worst-case scenarios didn’t materialise, markets recovered and we ended up having a positive year. It’s interesting because that was exactly one year ago.
Now, at point two, we are seeing a similar pattern. Markets initially reacted to higher oil prices and the risk of disruption to global energy supply. But given the turnaround, their view of the future suggests that the situation is likely to stabilise, or at least not escalate into a worst-case outcome.
The market tends to price the outcome before we fully understand it. Remember how the oil price spiked a couple of hours before the first bombings took place? Both the MSCI World and the JSE All Share Index are now positive year to date. That tells us something.
This doesn’t guarantee that the crisis will be resolved. Markets don’t deal in certainty. They reflect the balance of probabilities, which currently suggests that a worst-case outcome is unlikely.
That also doesn’t mean the Iran war will be resolved or that the Strait of Hormuz will be reopened. Companies and economies adapt. People have a remarkable ability to find solutions and work around problems. Perhaps this becomes another catalyst for shifts already underway, such as the move towards electric vehicles.
As always, the data show that trying to time the market or predict the future is a loser’s game. The market tends to price the outcome before we fully understand it. If we accept that the market knows more than us, we can start playing a better game.
Matthew Matthee has a wealth management business that specialises in retirement planning and investments. He writes about financial markets, investments, and investor psychology. He holds a Masters Degree in Economics from Stellenbosch University and a Post Graduate Diploma in Financial Planning from UFS. [email protected]
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