Oil price spike could trigger a bear market for stocks, according to Morgan Stanley’s latest analysis. War in the Middle East has already triggered a risk-off reaction, but the key question is: how high will oil prices go, and for how long? Equity indices are sliding, while gold, oil, and the U.S. dollar are rising, showcasing the current market uncertainty.
However, some stocks are bucking the trend. Energy majors and defense companies are higher, and Palantir (PLTR), the software group used by the U.S. military, is among the few tech gainers. Meanwhile, U.S. benchmark Treasury prices are lower, pushing up yields, as any flight to safety is counteracted by fears of higher inflation from the surging cost of crude.
According to Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, oil holds the key to whether this latest bout of geopolitical angst leads to a more damaging correction for stocks. “Historically, geopolitical risk events haven’t led to sustained volatility for equities,” says Wilson.
“The bear case scenario for stocks related to this past weekend’s events in Iran and across the Middle East would be if oil prices were to rise sharply/persistently, thereby posing a risk to the duration of the business cycle.”
History suggests that for surging oil prices to have a damaging effect, they would have to rise by 75% to 100% on a year-on-year basis and occur during the latter stages of an economic growth cycle. That’s not currently the case, as we are in an early cycle environment with an accelerating earnings recovery. The year-over-year rate of change on crude was just modestly in positive territory.
The Impact of Geopolitical Events
Wilson believes that unless oil prices spike in a historically significant manner and remain elevated, recent events are unlikely to change his bullish view on U.S. equities over the next 6-12 months. With earnings improving and the economy expected to pick up speed he has a target of 7,800 for the S&P 500 by the end of this year. If investors are cautious, then his favorite defensive sector is healthcare. For more insights, check out related Finance news.
How High is Too High for Oil Prices?
Concerns about oil supply amid war in the Middle East has pushed U.S. light crude futures sharply higher to more than $72 a barrel. The Organization of the Petroleum Exporting Countries and its allies agreed to a larger-than-expected increase in oil production next month in the wake of the U.S. and Israeli strikes on Iran.
Defensive Stocks Gain Amidst Uncertainty
Shares of Lockheed Martin and RTX are jumping as the U.S. military is using up significant amounts of ordnance in its bombing of Iran. Conversely, shares of airlines like United and American are down on fears of travel disruption caused by the Iran conflict and the increasing cost of fuel.
Looking Ahead at Market Data
U.S. economic data due Monday include S&P final U.S. manufacturing PMI for February, released at 9:45 a.m. Eastern, followed at 10:00 a.m. by the ISM manufacturing report for February. The oil price spike remains a key indicator to watch.
In conclusion, while geopolitical tensions and the resulting oil price spike are causing market jitters, Morgan Stanley suggests that a full-blown bear market will only be triggered if oil prices surge dramatically and persistently. Investors should closely monitor oil prices and economic data to navigate the current market volatility.
