Stock indexes step into correction territory
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When the Iran war started, market analysts issued reassuring notes: Short-lived geopolitical shocks don't typically rattle the stock market, they said.
Why it matters: We're now into month two of conflict. Equities are wobbling, and investors are growing increasingly skeptical of President Trump's assurances.
Where it stands: The tech-heavy Nasdaq index is now down 11% from its record-high close on Oct. 29 — officially entering correction territory.
- The Russell 2000, an index tracking smaller companies, landed in correctionville last week.
- The S&P 500 has held up a bit better, but it's down 7.2% from its closing high.
Catch up quick: Minutes after the market closed Thursday, Trump posted that he was extending the deadline for Iran negotiations.
- "As per Iranian Government request, please let this statement serve to represent that I am pausing the period of Energy Plant destruction by 10 days." That would bring his latest deadline to Monday, April 6.
The latest: That statement didn't calm the markets for long. Oil prices spiked to around $110 a barrel when the market reopened.
- "While the delay might reduce some of the immediate escalation risk, it offers no new visibility on the path toward resolution," Deutsche Bank analysts wrote in a note this morning.
The big picture: If the market does take a another leg down, the effects on American households would be more pronounced than in previous oil price shock moments.
- Nearly 40% of household wealth in the U.S. is tied up in stocks — compared with about 10% during the 1990 oil price shock, UBS economist Arend Kapteyn said in a note yesterday.
- That means Americans would be hit with a double whammy from the geopolitical conflict: higher energy prices and lower brokerage account balances. That in turn would be a drag on overall economic growth, as households cut back on spending.
- It would also be another downer to the consumer mood.
Zoom out: The stock market doesn't typically take kindly to long periods of high oil prices stemming from Middle East Conflict.
- Over the past 50 years, there were nine oil price shocks, where prices rose 20% or more, according to an analysis from Joe Seydl, a senior markets economist at JPMorgan Private Bank.
Zoom in: Four of those shocks led to a selloff in stocks — an S&P decline greater than 10%:
- The 1973 oil embargo, the Iranian hostage crisis, the 1990 Gulf war and the Russian Invasion of Ukraine in 2022.
- In each case, oil prices rose more than 50%.
Stunning stat: The price of Brent crude is up nearly 40% from the beginning of the war.
Yes, but: It's not just the oil price that triggered the selloff, Seydl writes. Each of those selloffs coincided with either a recession in the six months after the shock or Federal Reserve interest rate increases.
- The past doesn't predict the future.
What to watch: Weekend postings by Trump. The president has had a tendency to escalate the conflict with Iran with social media posts on Saturdays and Sundays that in turn has driven a lot of market volatility.
