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As Investors Shrug Off Iran Concerns, Some Analysts Find the Complacency ‘Disconcerting’

January 8, 2020, 10:12 PM UTC

You may not have heard the collective sigh of relief that investors around the world exhaled after President Trump’s comments indicated he wouldn’t escalate a brewing crisis with Iran. But for anyone invested in the stock market, it was palpable.

After Iran fired a series of ballistic missiles at two Iraqi bases housing U.S. troops, stock index futures late Tuesday fell, indicating a bad day for stocks today amid mounting concerns about an escalating crisis that could bring Iran and the U.S. to war.

Instead, stocks staged a tentative and modest rally amid signs that leaders in both countries were seeking ways to avoid further escalation. When Trump spoke on Wednesday, he said that no Americans or Iraqis were killed in the attacks and that Iran looked to be “standing down.”

The Dow Jones Industrial Average closed the day up 0.56% at 28,745.09. The S&P 500 Index rose 0.49%, to 3,253.05. It was hardly a feel-good rally, but it was a broad acknowledgment that the escalation many were dreading isn’t happening for now.

“The Iran fever has broken,” John Kilduff, a founding partner in Again Capital, said on CNBC following Trump’s remarks. “We have a lot less fear in this market now.”

Oil prices fell back with West Texas Intermediate crude oil futures falling more than 5% late Wednesday to below $60 a barrel. A prolonged conflict in the Middle East could disrupt oil supplies and push up energy prices, but that risk seemed more distant now.

Similarly, stocks of energy companies were among the relatively few decliners, with Exxon Mobil down 1.1% at $69.23 a share, Philliips 66 down 3.7% to $104.10 a share and Schlumberger off 2.9% at $39.41 a share.

It’s not clear whether the market’s calm response to the crisis reflects a hard-won stoicism or a sense of complacency after a year of steady, regular stock gains. But some in the market worry it could be the latter, which could spell higher volatility ahead if tensions flare up again.

“We would actually expect to see the market sell off a little bit more,” says John Traynor, chief investment officer at wealth-management firm People’s United Advisors. “That suggests a level of complacency out there that’s a little disconcerting. There are escalating macro risks that we just don’t believe investors are paying appropriate attention to. And, unfortunately, we think we’ll see increased volatility as these risks bubble up.”

That volatility could be exacerbated by a growing sense of unpredictability and uncertainty on several fronts. Despite the apparent de-escalation in Iran and the U.S. today, that may still be the case in the longer term, even if investors are largely refraining from pulling money from the stock market right now.

On the other hand, the stock market’s history in recent decades suggests that a stay-the-course mentality can make sense in the long term. LPL Financial, a Boston-based investment-management firm, looked at major political events going back to the 1941 attack on Pearl Harbor. It found that the S&P 500 fell an average of 5% on the day that a geopolitical event shocked the market. But it took an average of 47 days for the index to recover.

The S&P 500’s recovery time varied widely by event, but seemed to depend more on the broader economy’s health than the severity of the event itself. After the 9/11 attacks in 2001, the market needed 31 days to recover. By contrast, it took 189 days to recover after Iraq’s invasion of Kuwait in 1990, a year when the U.S. economy was headed into a period of prolonged weakness.

“No doubt worries over Iran have investors on edge,” Ryan Detrick, senior market strategist at LPL, said in a blog post analyzing the data. “Stocks could be volatile for a while, but the impact to stocks from geopolitical events historically has tended to be short-lived.”

In other words, it’s back to business as usual for the U.S. stock market, a sentiment that may feel at odds with the high stakes that are still on the table in the world of geopolitical tensions. That could change depending on how Iran responds to new sanctions Trump vowed to impose on the country, not to mention the ongoing war of words and tweets from leaders of both countries.

For now, though, investors are breathing a bit easier, at least tonight.

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