Topline: Despite ongoing U.S. tensions with Iran that derailed markets last week, U.S. stocks staged an impressive rebound on Monday, recovering from earlier anxiety on Wall Street.
- The S&P 500 and Dow Jones Industrial Average were significantly lower in pre-market trading, each down by around 0.5%. But both indexes slowly recovered losses throughout trading on Monday, ending the day up by 0.35% and 0.25%, respectively.
- Monday’s recovery was a sharp contrast to the sell-off last Friday, when both the Dow and S&P 500 had their worst day of trading in a month after a U.S. air strike killed top Iranian general, Qassem Soleimani.
- “The rebound wasn’t so much in response to a specific headline but instead a reduction in anxiety around the events in Iran,” says Adam Crisafulli, founder of Vital Knowledge. While there will be some Iranian retaliation, most reports suggest that it won’t be imminent or direct—“that’s why markets are being relatively calm about it.”
- Wall Street appears content with the view that tensions with Iran will eventually cool down: “The near-term conclusion from investors seems to be that a full on military conflict can be avoided,” according to Dan Eye, director of equity research at Roof Advisory Group, a division of Fort Pitt Capital Group.
- History shows that stocks usually recover from negative geopolitical events: Out of 16 major events dating back to 1990—including the Gulf War, Iraq War and 9/11—the Dow fell an average of only 2%. Over the next three and six-month periods, the Dow rose almost 90% of the time, with average gains of 5% and 8%, respectively, according to LPL Financial’s research.
- “As serious as this escalation is, previous experiences have indicated it may be unlikely to have a material impact on U.S. economic fundamentals or corporate profits,” LPL Financial’s chief investment officer, John Lynch, wrote in a note. He says investors selling off assets may be doing so prematurely, “given stocks have weathered heightened geopolitical tensions in the past.”
Crucial quote: While tensions with Iran and a weak U.S. manufacturing report—activity dropped to the lowest level in more than a decade—roiled markets last Friday, Monday’s recovery makes sense given that “neither of those two headwinds really derails the positive growth narrative of bullish investors right now,” according to Crisafulli.
What to watch for: Oil prices moved inversely to the major stock market indexes on Monday. After starting off at a high of more than $70 per barrel—thanks to a surge in prices last Friday, oil prices levelled out as Wall Street calmed on the Iran news. Despite the 4% rise in prices on the news last week, that’s “very modest” compared to the 15-20% spike in September after the Saudi Aramco oil fields attack, says Eye. What’s more, even if tensions in the Middle East continue to boil, the region is “just not as critical to global oil supply as it once was,” says Crisafulli. “If push really comes to shove, you have other options—whether it’s the U.S. or Russia—and that removes some risk.”
Tangent: Big tech stocks, like the FAANGs, also helped push the market higher on Monday: Shares of Facebook, Amazon, Apple, Netflix and Google all rallied several percentage points. Facebook hit a new 52-week high, while Google and Netflix notched the biggest gains, up by around 3%.