As highlighted in my previous post. Thursday, June 12, has been a tragic and exhausting day. It started with the terrible crash of an Air India flight in India, killing over 250 people—the worst aviation disaster in India since 1996. Then the day ended with Israel striking Iran, targeting their nuclear program and killing several top Iranian military officials.
The S&P 500 had just about been approaching its prior new high. And now this. However, as tragic as these events are, let’s keep some perspective, at least from a market standpoint.
It sounds like a lot and it is – Russia’s invasion of Ukraine tipped inflation over the edge, and we got the higher inflation in 40 years, COVID, 9/11 and many others pushed the economy over the edge into a recession. But the reality is bad news eventually will give way to good news.
Volatility Is Normal
Of course, investing in stocks doesn’t come easy, and the return premium you get for investing in stocks over bonds (and pretty much most other asset classes over time) in part reflects the fact that they are volatile. We just went through a near bear market in April, with the market dropping just about 19%. I have no idea what happens over the next few days, or even weeks, but I do know that another bout of volatility would not be surprising. A market correction of 10% happens most years, and sometimes more than once. They are more normal than you might think.
Despite several Middle Eastern conflicts that did not lead to market drawdowns, the Yom Kippur War in 1973 played at least some role in the ensuing market sell-off.
Could oil prices surge again? Perhaps, but OPEC has plenty of capacity to ramp up production (and will be under immense pressure from the Trump administration to do so). US shale will also be bolstered by oil prices rising above $70/barrel, and that is another major potential source of supply. Of course, the scale of disruption matters here, as we saw after Russia’s invasion of Ukraine.
Diversification Helps
One striking thing that’s happened post-Liberation Day is that even as stocks (and bonds) have more or less retraced their moves, the dollar has continued to weaken. If the dollar continues to weaken, that’s going to help international stocks relative to US stocks.
From a portfolio perspective, it may not be enough to rely on a single source of diversification in a portfolio all the time. It’s important to understand what environment you’re in. And if the environment is uncertain, as I think the current one is, having exposure to different kinds of diversifiers can be beneficial.
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