The muted moves also come as global oil supply and demand today are pretty balanced. This is different than conditions faced when Russia invaded Ukraine; back then, oil supply was already lacking relative to demand, and as the event disrupted even more supply, prices soared.

To us, this means that today’s markets can probably handle a moderate disruption – for instance, if the United States were to more strictly enforce sanctions on Iranian oil. Iran accounts for about 4% of global oil supply, and as tensions between the United States and Iran have thawed a bit lately, enforcement of those sanctions has been more lax. This has meant that some Iranian oil has still made its way to the market, and a harder line taken on enforcement would take some of this offline.

2. If the conflict escalates

Much is unclear, but a wider conflict would bring greater risk. Some have drawn parallels to the 1973 Yom Kippur War, during which Arab OPEC countries implemented an oil embargo targeted at nations that had supported Israel. As a result, the embargo spurred oil prices to surge over 300%, catalyzed high inflation and an economic recession and led to a prolonged rout in stock markets.

There isn’t any evidence so far of similar actions being taken today. Israel has better relations with other Arab countries compared to then, and global oil supply is not as concentrated. However, the conflict could escalate, for instance, if it formally pulls Iran into the fold. A scenario that sees disruption to important shipping routes like the Strait of Hormuz – which traffics about 20% of global oil consumption – would be much harder to digest.

Here, it's possible other producers could step in to stem some of the bleeding. The U.S. has been rapidly adding supply, and given time, it could add quite a bit more. It wouldn’t be enough to hold prices steady, but it would help to mitigate some of the pain. Some comfort might also come from the fact that the United States is less energy intensive than it used to be: Compared to the early 1970s, it now takes over 70% less oil to generate one unit of GDP.¹

So what should investors consider?

There may be volatility as investors wait to learn more, but in the long run, geopolitical events generally haven't had a lasting impact on markets.

Here, we’d refer to the seminal work of Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, who examined a handful of geopolitical events in post-war history. Most of the time, the business cycle has mattered more for investors, which means that barring a major economic disruption or imbalance, the effect of geopolitics on markets has tended to be short-lived.

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

The first thing to do is remember that staying invested in a diversified, goals-aligned portfolio has paid off through countless geopolitical crises, wars, pandemics and recessions and will likely continue to do so. This is not the first time geopolitical turmoil has been the catalyst of market turbulence.

From there, when uncertainty is high, it helps to focus on the fundamentals. Today’s backdrop of sticky inflation (see yesterday’s U.S. CPI print), the highest central bank policy rates in over a decade, and political division in Washington must also be taken in balance with a robust labor market, a still-strong consumer, resiliency in corporate America and fiscal spending efforts around industrial policy and AI that are doing real work to innovate, grow and transition the economy.

We think prospects for a soft landing for the U.S. economy have grown, and with more reasonable valuations, positive seasonal trends and earnings expectations climbing as we enter the Q3 reporting season, we think equities offer opportunity. With bond yields as high as they are today, fixed income seems to be compensating investors for uncertainty. For instance, as the geopolitical turmoil has unfolded and Federal Reserve policymakers have signaled the end of rate hikes, 10-year Treasury yields have fallen more than -20 basis points from their highs last week.

In all, while there are undoubtedly risks, we think there’s good value in the market based on what we know. Your JPMorgan team is also here to discuss your portfolio, the volatility, and how we can help.

All market data from FactSet and Bloomberg Finance L.P., 10/13/23.

DISCLOSURES

Small capitalization companies typically carry more risk than well-established "blue-chip" companies since smaller companies can carry a higher degree of market volatility than most large cap and/or blue-chip companies.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.

“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.

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RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
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• Structured products involve derivatives and risks that may not be suitable for all investors. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Structured products are complex debt obligations of a corporate issuer the return of which is linked to the performance of an underlying asset. They are significantly riskier than conventional debt instruments and may not be suitable for all investors.
• Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

IMPORTANT INFORMATION

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise. Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.