The Street's crash out

Wall Street hit the panic button after Brent crude soared as high as $119 per barrel at one point today. And while the selloff subsided by the time markets closed, investors’ nerves are understandably frayed.

You already know what high oil prices mean for the average person: inflationary pressure that will likely boost the price of gas, travel, groceries, and basically everything else. But Wall Street analysts are more concerned that the whispers of “stagflation” haunting their nightmares could soon become a reality.

Here’s what the Street is saying:

• JPMorgan’s head of global market intelligence Andrew Tyler turned “tactically bearish”— forecasting a 10% correction in the S&P 500 if the conflict doesn’t end soon.
• Ed Yardeni of Yardeni Research now puts the chances of a 1970s-style stagflation market meltdown at 35%.
• But it’s not all bad vibes: “There is the potential for faster inflation and slower economic growth, with assets focusing on different aspects thus far,” wrote Adam Hetts, Global Head of Multi-Asset at Janus Henderson. “However, risks remain two-sided. US political pressures means that a quick “victory” should not be ruled out. Asset prices, driven by energy prices, are likely to swing violently as investors alter their expectations for either outcome.”

So, how are the pros handling this:

• “We favor Quality and Healthcare for those seeking defensive hedges,” wrote Morgan Stanley CIO Mike Wilson in a note today. “Our baseline remains that further weakness in the near term sets up an opportunity to add to the cyclical trades we prefer over the intermediate term across Financials, Industrials, Consumer Discretionary and Small Caps.”
• And, as always, stay diversified across sectors and assets. “Ultimately, diversification, staying invested according to risk tolerance, and focusing on long-term financial goals remain the best strategies,” explained Bernstein Private Wealth Management’s Strategic Investment Solutions team in a note.

It’s not just the US, either

The sense of panic spread beyond just American markets.

Japan’s Nikkei 225 stock index plunged the most today since April’s tariff-related meltdown. Over in South Korea, the oil crisis is causing the government to impose a fuel price cap for the first time in 30 years. Perhaps surprisingly, China might be set up the best to handle an oil shock, given it has large crude stockpiles and has diversified its energy sources.

The bottom line: Everyone making predictions is just giving their best guess. “Situations like this demonstrate the value of well-diversified multi-asset portfolios,” explained Hetts. “Geopolitical events are rarely easy to gain complete clarity on, with the current US administration apparently embracing uncertainty as a negotiation strategy. What we can take away from the events of the last few days is that it is likely the conflict could last longer than many had initially hoped.”

In other words, the market whiplash is just beginning.—LB