Multiple institutions are offering psychological reassurance to investors, suggesting the market may be nearing a bottom. Capital markets continue to experience significant volatility in the aftermath of conflicts in the Middle East. Global stock markets have declined for the third consecutive week, marking the worst performance in nearly a year. Markets in both Europe and the United States have hit new lows for the year. Concerns over inflation, driven by a sharp rise in energy prices, have also triggered selling in traditional safe-haven assets like U.S. Treasury bonds, pushing yields significantly higher. Even gold has failed to provide shelter, with its price briefly falling below the $4,500 per ounce mark late on Friday. Investors are now watching for signs of a market bottom, waiting to see when the turbulence might subside.
A Three-Week Timeline? Historical data suggests that markets often bottom approximately three weeks after a crisis erupts. Deutsche Bank strategist Jim Reid, in a report, reviewed historical patterns to provide reasoning that the selling wave triggered by the current crisis may be approaching its end. Reid illustrated the average performance of the S&P 500 index following 30 major geopolitical events. "In terms of timing, the average low point for the S&P 500 tends to occur about three weeks after the initial shock, and we are now approaching that window," he noted. When measuring the median maximum drawdown low point following such events, it is approximately -6%, with an average around -8%.
"From a longer-term perspective, the median return recovers to pre-shock levels by the 34th day (less than seven weeks after the event), and the average return is also close to fully recovering its losses by that time," Reid stated. The independent investment research firm Variant Perception holds a similar view, believing market sentiment is on the verge of a shift and that the coming days could mark the peak of uncertainty related to the U.S.-Iran conflict.
Recent trading in some markets has descended into chaos, a signal that some traders are being forced to liquidate positions. "A very simple tactical liquidation indicator is: when gold and stocks fall sharply in tandem, it usually indicates margin call or forced liquidation behavior is occurring," the firm said. "We are in a phase of tactical liquidation. Investors are also panicking due to a sharp spike in short-term interest rates—the market has shifted from betting on multiple rate cuts this year to pricing in the possibility of rate hikes. The recent outperformance of the CBOE Volatility Index (VIX) compared to VIX futures also reflects the intensity of current risk-off activity."
All of this is happening concurrently with the escalation and spread of the U.S.-Iran conflict. This week's bombings of oil and gas facilities in the Middle East and Qatar's significant shutdown of natural gas production suggest the worst-case scenarios are beginning to materialize. "Severe damage to key energy infrastructure and a sharp drop in shipping traffic through the Strait of Hormuz were unthinkable just three weeks ago. Now they have become reality," the firm stated, suggesting this will likely be a landmark event marking the peak of market uncertainty in the coming days.
Up to 5% More Downside? For investors, the future trajectory of oil prices is crucial for the stabilization of risk assets. Strategists at Bank of America, led by Michael Hartnett, indicate that while the market has not yet seen full capitulation, it is moving closer to that point. The optimal signal to increase risk exposure, they suggest, is when 88% of global stock indices simultaneously fall below their 50-day and 200-day moving averages. Currently, the S&P 500 has reached this level, but global markets would need to decline another 3% to 5% to trigger this significant buying opportunity.
Another potential signal for a buying opportunity could be when the cash allocation in investor portfolios rises to 5%. Bank of America's March Fund Manager Survey showed this ratio has increased from a low of 3.2% to 4.2%; reaching the 5% threshold is not far off. Soaring oil prices are contributing to expanding market losses—Brent crude futures have risen by two-thirds year-to-date, impacted by the U.S.-Iran conflict and attacks on energy infrastructure in the Middle East.
Hartnett believes the upcoming midterm elections in November may motivate President Trump to seek a rapid de-escalation of the situation. This also forms a key basis for Bank of America's core investment recommendations: short positions when the U.S. Dollar Index is above 100; long positions when the 30-year U.S. Treasury yield hits 5%; and long positions if the S&P 500 falls below 6,600 points. However, if Trump's approval ratings do not recover after the conflict ends, U.S. stocks may struggle to reach new highs this summer.
The accelerated market correction this month actually began in October of last year—when the Federal Reserve began cutting interest rates while equities were at high levels. Hartnett stated, "The end of a sharp correction often coincides with the most oversold sectors hitting a bottom." This phenomenon is currently occurring in Bitcoin, software stocks, and the "Magnificent Seven" U.S. tech stocks. Previously overcrowded trades like gold, precious metals, semiconductor stocks, and emerging markets have also seen painful capitulation selling. Hartnett's team argues that it will be much safer for investors to increase risk exposure again once the market is convinced that oil prices will sustainably fall back below $100 per barrel.
Hartnett also outlined three core investment themes for the next five years: 1. The commodity bull market is spreading from gold to metals and the energy sector; countries controlling strategic resources like chips, rare earths, minerals, and oil will hold significant advantages. 2. Investors will favor international equities and U.S. mid-cap stocks over highly leveraged U.S. large-cap stocks. 3. Allocate to contrarian consumer stocks—these may benefit from policies aimed at assisting lower-income voters.