Contributors

Madison Faller

Global Investment Strategist

Matthew Landon

Global Investment Strategist

Tensions in the Middle East have escalated over the last week.

While it feels difficult to do so during times like these, our job as investors is to assess what impact the conflict might have on the global economy and financial markets and then determine if we need to change the advice we are giving about portfolios.

The message: Risks are higher than before, but so far, these most recent events do not derail our constructive view for the year ahead. There may be volatility as investors wait to learn more, but, in our opinion, the nature of the actions taken thus far seem designed to avoid material escalation. The market reaction has been on edge but notably muted.

This is not the first time geopolitical turmoil has been the catalyst of turbulence for investors. In the end, staying invested in a diversified, goals-aligned portfolio has benefited through countless geopolitical crises, wars, pandemics and recessions – and we believe that should remain true.

What happened

Since the Israel-Hamas conflict began in October, tensions have brewed as key actors react to the evolving situation. Last weekend witnessed a significant drone and missile attack by Iran against Israel, in retaliation for a strike on its consulate base in Syria. The world held its breath, awaiting Israel's response. Early Friday, Israel retaliated with a military strike on Iran. While the situation remains highly uncertain, Iran appears to be downplaying the incident, with a top official stating no immediate plans for retaliation.

The events mark a clear escalation of tensions in the region, but it’s worth noting that the attacks over the last week seem calculated to avoid intensifying the conflict while still demonstrating resolve.

In all, the geopolitical backdrop remains uncertain and carries more risk than it did before, but so far, there appear to be arguments against a wider conflict.

What we’re watching

Nerves seem tempered for now given the nature of the events and Iran’s de-escalatory statements, but uncertainty remains. If the parties don’t escalate further, and the conflict remains contained, global investors are likely to revert to the status quo, with the economic cycle in the driver’s seat and geopolitics a tail risk. But if the conflict escalates into one with a larger geo-economic footprint (particularly through involvement of more parties or a closure of the Strait of Hormuz), more careful analysis is required.

To do that, we are watching three main areas: 1) the impact on natural resources, 2) the effect on the economy (especially inflation) and 3) the follow-through into price action.

1) Impact on natural resources.

The gist: Iran itself is a smaller oil supplier, but the potential for conflict spillover into the broader region and/or disruption of significant transit routes like the Strait of Hormuz pose greater risk. Oil prices are likely to reflect some of these risks in the coming months, but we think we’d need to see meaningful escalation to see a pronounced spike to the 2022 highs of $125/barrel.

This line chart shows the Brent crude oil price from the start of 2021 to today.

 

Today, Iran accounts for around 4% of global oil production. As a point of comparison, Russia’s share of global production was almost three times that as it began its war with Ukraine and with far more developed economies reliant on those imports.

This table shows the top 10 oil producers and share of total world oil production in 2023.

 

However, two risks stand out:

  • The risk of a broader conflict. The Middle East as a whole accounts for roughly a third of global oil production. Should others in the region start to take sides, the energy supply picture could look more difficult.
  • The risk of transit disruption. Here, the Strait of Hormuz sees almost 20% of global oil supply and a significant amount of all shipping volumes. Iran’s geographic proximity to the channel poses a risk of immobilizing supply with a global impact.

To us, both risks appear contained for now. U.S. and European nations have been clearly against actions that could lead to wide-scale escalation. Iran’s own reliance on the Strait of Hormuz also makes its closure seem less likely – with severe consequences for its already struggling economy, as well as for Arab Gulf states broadly and China (i.e., Iran’s largest trading partner).

If we see a pronounced disruption, it’s worth noting that there seems to be room in the energy supply chain to deal with a shock. Such events would likely prompt some oil producers to bring additional supply online: OPEC+ producers have spare capacity, and the U.S. has also shown a proclivity to step in. Higher prices would likewise deter consumers, leading to demand destruction – we’ve already seen evidence of this as oil began its climb in late January. Those combined dynamics could partly – but not fully – counteract a geopolitics-driven surge.

2) The effect on the economy – especially inflation.

The next logical question is what a surge in energy costs could mean for inflation. And with central bank rate cuts already a debate, what might that mean for monetary policy?

Drawing on our recent analysis of inflation, the pass-through effect of higher energy costs into consumer prices differs across regions. In North America – where economies are predominantly energy-independent today – the potential impact appears less severe. Our analysis, which uses data back to 2000, implies that a surge in oil prices to their $125/barrel peak would result in a less than one percentage point spike to “non-energy” inflation. When it comes to growth, some comfort might also come from the fact that the U.S. is less energy-intensive than it used to be: Compared to the early 1970s, it now takes over 70% less oil to generate one unit of gross domestic product. In Europe, the inflation and growth impacts would likely be bigger.

Outside of energy prices, obstruction to global supply chains via the Strait of Hormuz could add pressure to goods prices (which have been deflating over the course of the last year) as companies try to pass on higher input costs (e.g., like shipping and air cargo prices).

Central bankers would need to balance such upside inflation risks with the potential growth headwinds. That would be tricky to navigate, but so long as there is not a genuine reversal of disinflationary trends, we don’t think policymakers would be forced to return to rate hikes.

3) The follow-through into price action.

So far, the market moves have been muted in the face of the recent events. That may be as media headlines over the last week – and months – have enabled investors to account for the risks. As Friday trading begins, oil prices are off their highs and back below $90/barrel, bond yields are lower, and stocks are just modestly down.

Outside of the immediate market reaction, it’s worth noting that the nations at the center of the conflict represent a small proportion of the global stock market: Israeli shares account for just 0.18% of the MSCI All-Country World Index, and the Middle East as a whole is 1%. Disruption in these economies alone also doesn’t seem a hindrance to earnings: S&P 500 companies derive just 0.2% of their revenues from Israel.

The risk, of course, is again more meaningful escalation that leads to inflation volatility and macro uncertainty that upends sentiment and business investment. But the fundamental backdrop for investors remains unchanged with the situation as it stands.

Investment considerations

Geopolitical threats are important for investors to consider and prepare for – a key point made in our CEO Jamie Dimon’s 2023 Annual Shareholder Letter. Already, economies are reorienting supply chains and increasing defense spending to bolster their security.

As we look forward, no one has a crystal ball – but history has taught us a few lessons on navigating events such as these. Drawing on the seminal work of Michael Cembalest (J.P. Morgan Asset & Wealth Management Chairman of Market & Investment Strategy), the business cycle mattered more for investors in the majority of the geopolitical events in post-war history he examined. Barring a major economic disruption or imbalance like we outlined above, the effect of geopolitics on markets has tended to be short-lived.

In his analysis, the 1973 Arab-Israeli War was one of the notable exceptions, as an OPEC oil embargo led to a surge in oil prices, high inflation, an economic recession and a prolonged rout in stock markets. So far, there isn’t evidence of similar actions being taken today. The world is also very different today than it was then: The United States now produces more oil than it consumes, and energy makes up roughly half as much of the average American’s spending than it did back then (4% today vs. ~8% in the 1970s). That means the inflationary impact of a potential escalation now would likely be more contained versus that episode.

The key takeaway: Staying invested in a diversified, goals-aligned portfolio has paid off through countless geopolitical crises, wars, pandemics and recessions and will likely continue to do so.

This chart shows the S&P 500’s performance during the 12 months leading up to a geopolitical event and the two years following.

Finally, with uncertainty high, it can help to focus on the fundamentals. Today’s backdrop of sticky inflation (see last week’s U.S. CPI print), debate about rate cuts and election mania must also be taken in balance with a robust labor market, a still-strong consumer, resiliency in corporate America and fiscal spending efforts around industrial policy and AI that are doing real work to innovate, grow and transition the economy. We still see a soft landing for the U.S. economy as more probable than not, and Europe and Japan are in the midst of their own economic recoveries.

So while there are undoubtedly risks, we continue to believe there’s good value in the market based on what we know today.

A J.P. Morgan advisor is here to discuss what this could mean for you and your portfolio.

All market and economic data as of 04/19/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

Connect with a Wealth Advisor

Our Wealth Advisors begin by getting to know you personally. To get started, tell us about your needs and we’ll reach out to you.

Connect now

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Index definitions:

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

Bloomberg Global EQ:FI 60:40 Index is designed to measure cross-asset market performance globally. The index rebalances monthly to 60% equities and 40% fixed income. The equities and fixed income are represented by Bloomberg Developed Markets Large & Mid Cap Total Return Index (DMTR) and Bloomberg Global Aggregate Index (LEGATRUU) respectively.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.

“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results

RISK CONSIDERATIONS 

  • Past performance is not indicative of future results. You may not invest directly in an index.
  • The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
  • Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
  • In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
  • When investing in mutual funds or exchange-traded and index funds, please consider the investment objectives, risks, charges, and expenses associated with the funds before investing. You may obtain a fund’s prospectus by contacting your investment professional. The prospectus contains information, which should be carefully read before investing.
  • Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the alternative minimum tax (amt).
  • International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the u.s. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in international markets can be more volatile.
  • Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the u.s. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in emerging markets can be more volatile.
  • Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
  • Real estate investments trusts may be subject to a high degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.
  • Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
  • Structured products involve derivatives and risks that may not be suitable for all investors. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team.
  • As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
  • For informational purposes only -- J.P. Morgan Securities LLC does not endorse, advise on, transmit, sell or transact in any type of virtual currency. Please note: J.P. Morgan Securities LLC does not intermediate, mine, transmit, custody, store, sell, exchange, control, administer, or issue any type of virtual currency, which includes any type of digital unit used as a medium of exchange or a form of digitally stored value.
  • The prices and rates of return are indicative, as they may vary over time based on market conditions.
  • Additional risk considerations exist for all strategies.
  • The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
  • Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

 

This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). The views and strategies described in the material may not be suitable for all investors and are subject to investment risks. Please read all Important Information.

GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.

NON-RELIANCE. Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

LEGAL ENTITY, BRAND & REGULATORY INFORMATION

In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

Bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.

This document may provide information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). The agreements entered into with JPMS, and corresponding disclosures provided with respect to the different products and services provided by JPMS (including our Form ADV disclosure brochure, if and when applicable), contain important information about the capacity in which we will be acting. You should read them all carefully. We encourage clients to speak to their JPMS representative regarding the nature of the products and services and to ask any questions they may have about the difference between brokerage and investment advisory services, including the obligation to disclose conflicts of interests and to act in the best interests of our clients.

J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document. JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.