In volatile times, the way to position for market beating returns is to look at the facts and the data and ignore the narrative and the story. So start with the fact that matters most. Oil is at $95 a barrel today, a little lower than it was yesterday. Stocks and bonds are trading up and most of the names on my equity monitor are green. It is the 18th day of hostilities in the Persian Gulf and the inverse correlation between oil and everything else is still holding.
Look further out and the oil market is pricing crude back to about $70 a barrel by September or October. That is the market saying hostilities end and oil flows again. I came up as an interest rate guy, and this is the same thing a bond trader does every day: read the forward price as a probability, not as a promise. That is how I am positioned. Investors would be wise to think about buying risk assets before a military conflict ends rather than after, and the difficulty is entirely in the timing. Some people think never. Some think any day. It is somewhere in between.
The mechanism has not changed. Oil has to flow freely out through the Strait of Hormuz to the global economy. Until it does, prices go up, economic activity goes down, and stock markets look vulnerable. Every other question is downstream of that one.
There is a part of this that is not a market variable and should not be treated as one. I am concerned the Iranian regime becomes more aggressive with the Iranian people, and there are still drones and missiles coming down indiscriminately on cities and population centers across the Gulf region. That feels criminal to me. None of it belongs in a P&L conversation, and I am not going to pretend otherwise.
On the economics, I do not see a big downtrend from here and I do not think there is a large hit coming. Q1 GDP estimates are lower nearly everywhere for obvious reasons. They will not stay lower forever, because economic activity resumes when it is safe to resume, and redevelopment across the Gulf is a substantial economy coming back online. Everyone in the region would like that outcome, and so would I. Global markets are pointing at it as the high probability path. I could be wrong, but I would rather trade the data than the story.
