Market Ponders the Economic Benefit of Regime Change in Iran
The split between bulls and bears has been influenced by political views. Here's how traders should deal with this dynamic.
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The eruption of hostilities between Israel and Iran shook up markets around the world on Friday, with oil spiking higher and equities declining. However, the losses in stocks were well contained, and bonds barely reacted.
On Monday morning, U.S. indexes are indicated higher, oil prices are lower, bonds are down, and gold has reversed lower. That indicates that the market views this shift in power in the Middle East as a potential positive. While there is a loss of life and economic chaos in the near term, the potential for a change in the leadership in Iran is widely viewed as an economic positive. Iran has been a source of economic and political disruption for decades and is now on the brink of being destroyed.
One of the primary questions now is whether the U.S. will assist Israel in destroying the enriched uranium that is stored under a mountain in Fordow, Iran. The U.S. has largely distanced itself from direct participation but is likely to become more involved if regime change becomes a clear possibility.
With the market extended and valuations elevated, a war in the Middle East would appear to be an ideal catalyst for a market selloff. However, the main theme this year has been to run over the pessimists and bears who keep looking for a reason for the market to sell off. Economists who have consistently predicted sticky inflation and slower growth have been proven wrong, and now the bears are trapped again as the market shows a favorable response to the events in the Middle East.
One of the most interesting dynamics at work is how political views are influencing market bias. According to the Wall Street Journal, a Gallup poll this spring showed that Democrats who expected stocks to tumble over the next six months exceeded Republicans by 59 percentage points, while Republicans expecting stocks to climb over that period topped Democrats by 47 percentage points.
Democrats have been convinced that President Trump would blow up the economy with his trade and tariff policies, while Republicans have remained optimistic. There is likely a similar political disparity when it comes to evaluating the impact of the war between Israel and Iran.
The best way to deal with this split in market views is to stay focused on the price action rather than the political arguments. The price action is our best guide to how things will unfold, and when it shifts, it is important to react quickly and to understand what the justifications may be for the shift.
Currently, the market is telling us that the potential of regime change in Iran is a positive for the economy and markets around the world. Some folks may question that view, but the price action is the only opinion that ultimately matters.
We have a mildly positive start on Monday morning. Don’t forget that markets are closed this Thursday for the Juneteenth holiday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
