Geopolitical uncertainty is rearing its ugly head once again. But this time, it's a screaming buy signal for U.S. stocks...
On February 28, the U.S. and Israel launched the first of a series of strikes on Iran. The initial attack took out Iran's supreme leader and other key officials. Iran retaliated with strikes of its own across the region. And the situation continues to escalate.
Politics aside, this quickly became an investment story – mainly because oil prices spiked as the strikes began...
Crude oil jumped 6% on March 2. Then, it jumped another 5% the next day. And prices have remained high since the strikes began.
Most investors would assume oil spikes are bad news for stocks. But they'd be wrong.
History shows that this kind of setup is rare. And it's a major buy signal for U.S. stocks... with 19% upside possible over the next year.
Stocks Follow Suit After Oil Prices Surge
It's true – oil price spikes should be bad for markets.
For one thing, they tend to happen when some kind of turmoil is underway. That could be a war... or a supply pinch... or another unexpected problem.
Plus, energy costs more when oil prices soar. That means companies end up spending more money on energy bills instead of investing in growth.
You'd think that would be a recipe for an economic slowdown... and a weak stock market. So it's no surprise folks are worried after last week's surge.
Again, oil spiked by 5% or more for two straight days. And then it kept rising. Take a look...
The operations in the Middle East sent oil prices to nearly $120 per barrel in intraday trading early last week, before giving back some of that rise. That's the highest we've seen since mid-2022.
While most folks would say this is a reason to sell, history disagrees.
To see it, I looked at each unique case of oil jumping 5%-plus for two straight days. That's a rare setup... It has only happened 11 other times since 1986. But as I said before, it's a screaming buy signal for stocks. Take a look...
This gives us some important hints of what to expect in the coming months.
First, expect volatility in the short term. After oil prices spike, folks don't know what'll happen next. That uncertainty drives the three-month return down to a paltry 0.8%, well below the typical three-month return.
By six months, folks see that the worst-case scenario hasn't played out. And stocks start catching up to their typical six-month return, with a 3.5% gain.
The one-year period is where things get interesting. Stocks are typically up 18.6% a year later. That's a healthy return... and it's about double the typical one-year gain.
Few would believe these results, especially with today's frightening headlines. But history filters out that noise and tells us what we can actually expect.
We shouldn't be bearish today. Stocks are holding up well, despite the bad news. And history shows big gains are likely over the next year.
Good investing,
Brett Eversole
Further Reading
When Wall Street's and Main Street's predictions don't align, which should you believe? History says we should trust the market. And right now, a rare setup is pointing to a double-digit rally in the coming months.
"The upward move is likely just getting started," Chris Igou says. Tensions continue escalating in the Middle East, and the conflict is disrupting various markets. But one asset went on a rare hot streak... which signals this rally still has room to run.