There’s a particular kind of unease that creeps in when market headlines start mixing geopolitics with talk of oil prices and recessions. That feeling has been hard to avoid, as the escalating war in the Middle East spooked global markets and brought fresh uncertainty to an already fragile economic landscape.
For investors, watching so many forces moving at once and volatile numbers, there can be a strong temptation to “do something”.
Before reacting, a good understanding of what’s driving market movements is useful to assess the short and medium term. More importantly, it helps to work out how your long-term strategy fits in.
Energy markets have felt the most immediate effect of the conflict pushing oil and gas prices ever higher.
Global share markets also responded quickly to the crisis with sharp falls and volatility.
The conflict has come at a time when the global economy was already fragile.
Adding an energy price shock into the mix increases the risk that higher costs slow spending and investment.
In Australia too, there’s increasing talk of recession – as much as a 30 per cent chance within the next 12 months, according to AMP.i
However, Treasurer Jim Chalmers disagrees saying that, while the economy is expected to take a “sizeable hit”, a recession is not expected.ii
The immediate effects
Market volatility is likely to continue with sharp price swings as the markets react to either good or bad news coming out of the Middle East.
For households, the most visible impact is likely to be at the pump and in their power bills. Widespread price rises here are likely to affect consumer confidence and spending patterns.
So-called “safe-haven” assets such as cash, government bonds and some currencies often benefit during uncertain times as investors look to defend their portfolios, however bond yields have experienced volatility as investors assess the evolving situation in the Middle East.
Gold was also once on the list of safe havens. But, during the most recent crisis, its value has plunged nearly 15 per cent during the month. Nonetheless the price remains high – up by almost 300 per cent over the past decade.iii
While there’ll be plenty of market “noise” ahead, it’s important to remember that short‑term market reactions may be driven as much by emotion as by fundamentals. Fear, uncertainty and rapid shifts in sentiment often exaggerate price moves in the early stages of a crisis.
Looking further ahead
Looking beyond the immediate panic, the medium term (the next six to 18 months) will depend on how the world adapts to the energy prices shock.
Continued high oil prices can have several effects:
- Inflation pressures may linger
- Economic growth and corporate earnings may slow
- Long‑term opportunities may be created by the market disruptions
It is also worth remembering that energy shocks don’t last forever. Markets adapt, alternative supply routes emerge and prices eventually reflect new realities. The timing is uncertain, but history suggests that economies and markets are more resilient than they often appear in the heat of the moment.
Strategy over fear
Perhaps the most important thing to remember right now is that your financial plan was built for times like this.
Sound financial planning anticipates that markets will be periodically disrupted by wars, pandemics, financial crises and recessions.
The discipline required in moments of market stress is to distinguish between short-term fear and long-term strategy. Fear says: sell everything and wait for calm. Strategy says: stay invested, stay diversified and if anything has changed, let’s talk about it properly.
If the events of last month have raised questions for you, we’re here to help you navigate with confidence. Please give us a call.
i Fuel surcharges are adding to consumers’ financial stress | ABC News
ii Chalmers says there is no ‘expectation’ of a recession | The Guardian
iii Gold is meant to be a ‘safe haven’. Why is it crashing? | The Conversation
