Patience is a virtue

Part of the reason I spend so much of my time writing these blogs is to put my experiences in words so I may learn from them and see whether my intuition holds up. I was, for example, completely taken in by the consensual view that COVID was likely to have a negligible impact on the global economy, despite some evidence to the contrary. To my knowledge, passengers had never been allowed off a cruise liner during bird flu outbreaks, which should have been a pretty good clue that this was something different this time. Economists and strategists had a body of evidence indicating that such outbreaks, including bird flu, had a limited impact on economic growth; how wrong they were.  That taught me that being complacent and expecting what happened in the past to repeat itself does not take into account circumstances change.

So far, my focus, as tensions have increased between America and Iran, has been on the implications for oil prices, aside from other considerations. Rising oil prices, particularly as a result of a supply shock, slow growth, and, at the same time, push inflation. The worst of both scenarios for a central banker, as it effectively risks the chances of stagflation. A 20% rise in oil prices cuts global economic growth by 0.5% and raises prices by 1%, according to the perceived wisdom, if sustained over an extended period of time. How sustained that rise in the oil price needs for that impact, not so sure. There can be secondary effects; recently, fears about private credit funds have been growing, and these fears will only increase during economic uncertainty.

Interestingly, over the past few days, European stocks have taken the brunt of the sell-off, with the FTSE 100 down almost 5% from its recent highs and the S&P 500 just around 1%. The S&P 500 has shown limited reaction. The Vix has jumped to the mid 20’s, increased fear but not panic yet. What happens in the Straits of Hormuz, and whether tankers are able to get through, will affect the oil prices in the coming weeks, and that’s why Trump has said he is prepared to escort ships through. It is also true that Trump will not want to see a sustained period of higher oil prices, it hits the consumer right where it hurts, even in America. Not good for popularity.

The consensus view at present is that these periods of geopolitical shocks tend to be short-lived and provide opportunities to add to the portfolio. Sell-offs always do. Liberation Day last year was a good example. Patience, as they say, is a virtue.