“All heck is breaking loose on the geopolitical stage,” Bespoke Investment Group co-founder Paul Hickey wrote in a note to clients on Friday morning.
Iranian officials promised a “crushing response” for the killing of Soleimani, who is one of the nation’s most important figures.
‘Retaliatory spiral’ looms
The biggest risk is a military conflict that deals a blow to consumer confidence or unleashes a costly oil price shock.
“We think the stage is set for a retaliatory spiral that could keep markets on edge well into 2020,” Helima Croft, a former CIA analyst who now leads commodity strategy at RBC Capital Markets, wrote in a report Friday morning.
Anything that disrupts consumer spending would be a major problem for the US economy, because American households are arguably the strongest piece of the world economy right now. The US manufacturing industry, on the other hand, is mired in a trade-war-fueled recession.
“The primary issue, which no one knows, is how much retaliation may develop and on what scale,” Eric Freedman, chief investment officer at U.S. Bank Wealth Management, told CNN Business in an email.
Analysts at the Eurasia Group warned that the chance of a war has increased to 40% from 20% previously following Thursday’s US drone attack. However, the consulting group said a limited conflict lasting days is more likely than a months-long, regional conflict.
“One thing is clear: Iran will respond. Iranian leaders are proud and quite risk acceptant,” Henry Rome of the Eurasia Group wrote in a Friday report.
US officials said they were on the lookout for possible retaliatory actions from Iran, including the possibility of cyberattacks. Iranian hackers have previously been accused of cyber infiltrations on US banks, dams and other critical infrastructure.
Turbulence in financial markets is a risk in itself. A sustained plunge in stock prices could dash confidence among households and CEOs alike.
Extreme greed is still here
Yet that does not appear to be playing out. Markets quickly bounced off their worst levels.
“Individual geopolitical risks tend not to be sufficient to drive a sustained downturn in markets,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note to clients.
Others urged investors to take advantage of the rare selloff to find an attractive entry point into the previously red-hot stock market.
“We remain firmly bullish on tech stocks and the growth prospects of the coming year and believe any temporary risk-off trade is a golden buying opportunity rather than a time to retreat with the bears yelling fire in a crowded theater,” Daniel Ives, an analyst at Wedbush Securities, wrote to clients on Friday.
There are hopes that cooler heads will ultimately prevail.
“Iran’s leaders probably aren’t suicidal; we doubt they will take action that will trigger air strikes on Tehran,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a Friday report.
The impact of the shale revolution
There’s also debate over the impact of oil spikes in the modern economy.
Clearly, a surge in oil prices above $100 a barrel would be painful to many Americans as well as airlines, trucking companies and other parts of the transportation industry.
Every $5 increase in oil prices is equivalent to an annualized tax of about $183 billion per year, or 0.1% of global GDP, according to Shepherdson.
At the same time, this is not the 1970s. Due to the shale revolution, the United States is now the world’s leading oil producer. Texas alone pumps more crude than most OPEC nations. That makes America less reliant on foreign oil than in the past.
If anything, a spike in prices would force oil companies to rapidly spend more money to increase production. That in turn would spill over into the rest of the economy.
This thinking could help explain another reason why investors are not freaking out about the rising tensions with Iran — at least not yet.