Markets & Geopolitics: When Will Stocks Recover?
Erin: Mark, so good to see you. We are going to dive into the headlines today, talking about markets and geopolitics with the question: When will stocks recover? Rising tensions in Iran have pushed oil prices higher and created short-term volatility in the markets. Historically, however, geopolitical conflicts tend to have only a temporary impact on stocks. But to take a closer look at what we’re seeing right now, this is the S&P 500’s one-month performance. We see a lot of red on the board here. So why do we tend to see stocks fall first when tensions rise?
Mark: Well, one of the drawbacks of stocks is that they’re fully liquid—but it’s also one of the benefits. The stock market trades all day, five days a week, so pricing happens in real time. You’re competing with inflows, outflows, and expectations of future profits. There’s often uncertainty in the markets, and sometimes that uncertainty increases quickly. Investors may need to sell for a variety of reasons, including international investors who need to bring capital back home. Because the U.S. market is the deepest and most liquid, it often absorbs the brunt of that selling. We saw something similar during COVID, when international investors with heavy U.S. allocations sold positions.
Erin: And I know that you’ve been working overtime analyzing historical data and recently presented 20 charts in your April CIO notebook. I picked five to take a closer look at. Let’s start with the oil price shock—what should we notice here?
Mark: Oil prices have moved from the low $60s to over $100 per barrel, which is similar in magnitude to what we saw in 2022 when Russia invaded Ukraine. After that spike, prices eventually declined. This current situation is what we call an oil price shock. The issue isn’t necessarily supply—it’s getting oil to its destination and to refineries. What you hear in the news is that the Strait of Hormuz is effectively closed. About 20% of global oil consumption flows through this narrow passage, which is only about two miles wide for shipping lanes. If ships stop moving through due to safety concerns, it creates a bottleneck. However, it’s important to note that the U.S. doesn’t receive much oil through the Strait of Hormuz. Most of it goes to the Asia-Pacific region, particularly China.
Erin: Alright, and next, let’s talk about the U.S. being the largest producer.
Mark: A lot has changed in the oil and geopolitical landscape over the last 10 to 15 years. You might expect oil price spikes to significantly impact the U.S. economy, but that’s not necessarily the case anymore. The U.S. is now the largest petroleum producer in the world—larger than Russia and Saudi Arabia combined. This shift makes us somewhat insulated from global oil shocks. In fact, we may even benefit from rising prices since we are a net exporter of petroleum products. That’s a relatively recent development.
We do still import some oil, though. The reason is that there are two types of crude: heavy crude (Brent) and light sweet crude (West Texas Intermediate), which is what we produce domestically. Our refining infrastructure is better suited for heavy crude, so we import that—primarily from Canada and Mexico—not from hostile regions.
Erin: Okay, and let’s circle back to geopolitical crisis events.
Mark: You asked when markets tend to recover. Looking at a composite of 57 geopolitical events, the S&P 500 typically experiences about 60 days of volatility. That’s a natural response given uncertainty and the “fog of war.” But after that period, markets tend to move into a bullish trend. As uncertainty fades and worst-case scenarios don’t materialize, markets regain footing and move forward.
Erin: Right, we often talk about rallies following downturns. Next, let’s discuss the cash on the sidelines.
Mark: There has been a significant increase in cash holdings. Between corporations and households, there is about $6.7 trillion in cash—checking and savings accounts. This isn’t necessarily waiting to be invested; rather, it provides a cushion during uncertain times.
This cash helped prevent a recession in 2022 when inflation spiked. Consumers dipped into savings to maintain spending, and corporations continued investing in capital expenditures—improving productivity and supporting future growth.
Erin: Okay, and finally, let’s talk about valuations.
Mark: There has been concern about elevated valuations, and to some extent, that’s valid. But stocks ultimately follow earnings, which tend to grow over time. This chart shows the price-to-earnings ratio, which has already declined about 18.9% from its peak. Historically, that’s about the average correction in valuation over the past 20 years, and it typically takes around 115 days. Currently, we’re about 48 days into this cycle. That suggests a significant portion of the adjustment may already be behind us.
In other words, stocks may not need to fall much further. Instead, the market may simply need more time to stabilize. There could still be some short-term volatility, especially if uncertainty increases or oil prices spike again, but much of the downside work may already be done.
Erin: Right. That historical context is important and helps us navigate stressful headlines. Mark, thank you so much for your time today.
Mark: Thanks, Erin.