Global stocks understandably slumped last week as the war in the Middle East drove a 35% surge in crude oil prices. Without boots on the ground, US and Israeli missile strikes appear unable to easily dislodge the Iranian regime, which—at least for now—appears determined to dig in.
At the time of writing, WTI oil prices have surged to around $US106 a barrel. and the S&P/ASX 200 fell 2.85% (down over 4% earlier in the day).
Perhaps the most important development last week was Iran’s success in scaring many oil tankers away from the Strait of Hormuz, through which roughly 20% of global oil trade flows. With shipments disrupted and storage tanks filling quickly, several Middle Eastern producers have begun cutting output.
Drone and missile attacks on oil refineries have only added to the risks. The longer the conflict drags on, the greater the upside risk to oil prices—and the greater the pressure on Trump to attempt to strike a deal.
Bond yields also rose globally rather than falling, as investors focused more on inflation risks from higher oil prices than on the downside risks to growth.
Developments in the Iran conflict will again dominate the week ahead. The key question is simple: who blinks first—and could it happen as soon as this week? The resilience of the Iranian regime under heavy attack appears to have surprised the US. Whether it can hold out remains uncertain. The longer it does, the greater the pressure on Trump to “do a Greenland”—declare victory and walk away.
Here’s the good news…
The ASX has risen 7.4% over the past 12 months, with dividends likely adding around another 4%. That brings the total return to roughly 11.4%, give or take.
That’s comfortably above the market’s long-term average return of just over 9% — depending on the source and starting point — but broadly consistent with estimates based on around 120 years of market history.
Market volatility is nothing new; we’ve been here many times before. Endurance and a long term perspective are key in times of uncertainty.
More to come.
Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial