Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

January 22, 2020

John LaForge, Head of Real Asset Strategy

Austin Pickle, CFA, Investment Strategy Analyst

Shrug—How Stocks Have Reacted to Middle East Flare-ups

Shrug—How Stocks Have Reacted to Middle East Flare-upsSources: Bloomberg, Ned Davis Research Group, Wells Fargo Investment Institute."0" indicates the start of the crisis. Indexed to 100 as of crisis date. Lines indicate the average performance of S&P 500 Index and West Texas Intermediate (WTI) oil price. Daily data: crisis events from 1990 to present. Please see end of report for list of crisis events. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. This chart was excerpted from the Global Macro In Depth report dated January 16, 2020.

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Performance of the S&P 500 Index and WTI crude oil prices before and after Middle East crisis events

History suggests that when turmoil in the Middle East hits, investors should expect volatile oil prices. However, these crisis events historically have not posed long-term threats to oil supply. As a result, oil price volatility has not tended to last very long on average.

The vertical black dashed line represents the start of the 20 Middle East crises since 1990. The orange line highlights average oil performance going into—and coming out of—these crisis events. Notice that initial oil price spikes have lasted, on average, about three months, then have faded as the peak risk to oil supply faded, too. The blue line shows the average performance of the S&P 500 Index. Notice that U.S. stocks have tended to shrug off Middle East turmoil, even during the initial oil price spike.

What it May Mean for Investors

The impact of Middle East crises on oil prices typically has been short-lived, and Middle East turmoil typically has not negatively influenced stock markets. To be clear, it is not that oil prices do not have an impact on stock markets. They certainly can. The impact, however, is usually felt when oil prices have been grinding higher over a longer period than three months.

List of Middle East crisis events

List of Middle East crisis events

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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