Friday, February 27, was the last trading day of the month. Consequently, no trading records captured what we will remember this month for: the US and Israeli attack on Iran on the very next day. Other events during February obviously pale in comparison.
However, the very anticipation of the attack did move markets. Long rates declined, high-yield spreads rose, and growth stocks fell – despite the lower interest rates. I guess risk-off would be a fitting label. In another flight to safety, most commodities rose significantly, with silver a lone exception, though after months of strong gains. Of particular interest: Brent crude (spot) rose by more than three dollars.
The Norwegian equity market, with its high share of energy and defence companies, rose by a full 7.5 per cent in February. In contrast, the S&P 500 fell by close to one per cent. The Danish stock market fell sharply, but again for reasons unrelated to common market factors: Heavyweight Novo Nordisk published somewhat disappointing results from another medical trial.
There was no shortage of warnings. On February 6, with diplomatic talks going nowhere, Trump told US citizens to “leave Iran now”. On February 20, he warned that Iran had “10–15 days to make a deal”. Apparently, financial markets took notice.
They usually do. Looking at the S&P 500 response to 13 geopolitical shocks in the past 35 years, from the Gulf War to the Covid pandemic, the average return over the 10 days preceding the outbreak was -0.8%, followed by a further decline of 1.2% on the first trading day after the shock. Obviously, such events are not good news.
Do note, though, that it doesn’t continue like this. Fast forward three years, and the average return was 44% (13% annualised) and after five years, it was 81% (22% a year).
In other words, historically, such events have provided a poor reason to exit the market – and all the more reason to stay invested.
That being said, I’m obliged to stress that historical returns are no guarantee of future returns. This is both true and a regulatory requirement. History doesn’t repeat itself.
On the other hand, it doesn’t necessarily negate itself either.
Finn Øystein Bergh joined Pareto in 2010, the first years in Pareto AS before joining Pareto Asset Management in 2015. He has previous experience as a journalist, chief economist and later managing editor in the financial magazine Kapital. Finn Øystein Bergh holds an MSc in Economics and Business Administration, MBA, cand. polit. (an extended master's degree) in political science and cand.polit. in economics. He writes the financial blog Paretos optimale, and has published several books on economics.
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