U.S. stocks have maintained their strong performance relative to other global markets, despite the repercussions of the Iranian war that began in late February. However, this relative strength may not be sufficient to shield them from sharper declines if the conflict in the Middle East continues.
Since the onset of U.S.-Israeli military strikes on Iran, the benchmark Standard & Poor's 500 index has dropped by 4%, while the Stoxx 600 European index has fallen by 9%, and the Japanese Nikkei index has plummeted by over 12%. Additionally, the iShares fund for stocks outside the U.S. has decreased by more than 8%, according to reports from Reuters.
Event Details
According to Young-Yu Ma, chief investment strategist at PNC Financial Services Group, the United States is capable of absorbing economic impacts more than other parts of the world, allowing it to outperform other markets. However, he cautioned that this outperformance does not mean there will be no declines, as markets continue to face pressures.
Stocks rebounded on Monday after U.S. President Donald Trump indicated productive talks with Iran, highlighting the market's sensitivity to developments in the Middle East. Investors point to several factors supporting U.S. stocks, including that other regions are more vulnerable to energy price shocks resulting from the war.
Background & Context
The shift towards a more service-oriented economy away from manufacturing, along with diversified energy sources, has made the U.S. economy less reliant on oil. Oil prices have surged by over 30% since the crisis began. Monica Gera, head of geopolitical policy and strategy at Morgan Stanley, noted that current production requires 70% less oil to generate the same GDP compared to 1980.
The United States is the largest oil producer in the world and a net exporter, with only about 4 to 8% of U.S. oil passing through the Strait of Hormuz, while around 20% of global production transits this strait. This isolation makes the U.S. less vulnerable than other developed nations that are more dependent on imported oil.
Impact & Consequences
The significant concentration of technology stocks in U.S. indices is another factor supporting performance, as the technology sector in the Standard & Poor's 500 has declined by less than 2% since the war began, compared to 16.5% in the iShares ACWI fund for stocks outside the U.S. This reflects that the business model of the technology sector is not significantly affected by oil price fluctuations.
The rise of the U.S. dollar, which has increased by about 1.5% against a basket of currencies since the crisis started, has also bolstered local stocks. Investors have reduced their exposure to non-dollar-denominated stocks to shield themselves from potential downturn scenarios.
Regional Significance
Arab markets are directly affected by developments in the Middle East conflict, with rising concerns about oil prices and their impact on local economies. The continuation of the conflict may lead to a decline in foreign investments in the region, exacerbating economic pressures.
In conclusion, investors remain cautious that the previous market environment may return if the war ends quickly, potentially restoring the strength of international stocks. However, the current situation reflects a state of uncertainty in global markets.