History says stock-market dips caused by geopolitical turmoil 'should be bought, not sold'

By Isabel Wang

Further escalations in the Middle East could evolve into a 'tail risk' for the U.S. stock market, BofA Global Research says

Recent geopolitical tensions in the Middle East are offering dip-buying opportunities for investors, because history shows that stocks usually bounce back within three months. Further escalations in the Iran-Israel conflict could, however, evolve into a "tail risk" for the market, according to BofA Global Research.

"Geopolitical events with limited fundamental implications have historically offered buying opportunities," a team of strategists led by Ohsung Kwon, equity and quant strategist at BofA Global Research, said in a Monday note.

Since 2010, the S&P 500 SPX has suffered an average peak-to-trough decline of 8% during major "macro shocks" or geopolitical events, but the large-cap index has "more than fully recovered" three months thereafter, suggesting that such dips should be bought, not sold, according to BofA strategists.

See: Stock market traders should follow these results when military conflicts break out

U.S. stocks and bonds suffered a wave of selling last week, with investors stuck in full risk-off mode amid fears of a widening conflict in the Middle East after Israel retaliated against Iran for its massive missile attack earlier this month. Meanwhile, worries over sticky inflation and hawkish remarks from Federal Reserve officials, including Fed Chair Jerome Powell, forced investors to reassess when the central bank will be able to cut interest rates this year.

The S&P 500 has fallen 5% so far in April, on pace for its biggest monthly drop since December 2022. The Nasdaq Composite COMP was off 6.1% and the Dow Jones Industrial Average DJIA has dropped by 4.2% this month, according to FactSet data.

See: This timeline charts oil prices reacting to Israel-Iran attacks so far. What comes next?

There has been no further escalation in tensions between Iran and Israel over the weekend, providing some relief to the dismal market sentiment on Monday. Oil prices (CL00) (CL.1) were pulling back, with Brent crude (BRNM24) hovering around $86 a barrel on Monday afternoon. Gold futures were also slumping, paring its safe-haven demand to trade at $2,355.10 an ounce (GC00) (GCM24), the lowest since April 10, according to FactSet data.

However, BofA strategists said on Monday that further escalations in the Middle East could evolve into a "tail risk" for the stock market, driving up energy prices and risking a repeat of 1970s-style inflation (see chart below).

The Yom Kippur War between Israel and a coalition of Arab states led by Egypt and Syria in 1973 fueled a second inflation wave in the 1970s. A temporary cessation of oil shipments from the Middle East to the United States, imposed by oil-producing Arab countries in retaliation for support of Israel during the war, contributed to an upward spiral in energy prices.

Between the Yom Kippur War and the peak in energy inflation in 1973-74, the S&P 500 fell 32%, with all 11 sectors down (see chart below). The S&P 500 materials XX:SP500.15 and energy XX:SP500.10 sectors were the best-performing sectors, while the consumer discretionary sector XX:SP500.25 lagged the broader market during this period, according to data compiled by BofA strategists.

The S&P 500 and the Nasdaq attempted to rebound on Monday from their worst week of the year, up 0.5% and 0.6%, respectively, as investors braced for a slew of corporate earnings due later in the week. The Dow industrials were rising 0.4% on Monday afternoon, according to FactSet Data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-22-24 1237ET

Copyright (c) 2024 Dow Jones & Company, Inc.