Why Aren’t Investors More Worried?

Markets reacted very sharply to news of the Iran ceasefire agreement last week, only to be met with news to start this week of a US blockade of the Strait Of Hormuz, which is critical for global energy flows. So how are markets navigating this uncertainty, and what can investors expect ahead? I'm Alison Nathan, and this is Goldman Sachs Exchanges. My guest today is Dominic Wilson, senior markets adviser in Goldman Sachs Research. Dom, welcome back to Exchanges.

Thank you. So,

Dom, we have had nothing short of a roller coaster of developments and headlines related to the war in Iran. And I have to say, the most recent ones in terms of this blockade I just mentioned are not very encouraging about seeing a quick resolution to this conflict. But if you look at the markets and the S and P 500 in particular, it is pricing just below where we were before the conflict even began. So let me just start by asking, does that surprise you at all? And are the is the market really underestimating the downside risk here?

So the two parts of those questions, I think, are different from each other. So the first, is it a surprise? What I would say is that the thing that we've been reminding ourselves is that as you move through crises, as you move through the these kinds of events, what you tend to see is the market worry a lot, and then the first stage of relief comes mostly from removing the weight that people put on the very bad tails that are out there. And so seeing a recovery period where there's a lot of things unresolved, I think that in itself is not unusual. If you think of COVID, if you think of tariff

But just to be perfectly clear, I agree with everything you said, but we now supposedly have this blockade. So effectively, some oil was getting through, may not a lot, very little, but some was. And now we're saying none will.

Yeah. And I'm saying in a funny way, this is the reminder. The way that I've kind of experienced, and I think some of us have experienced this round of crisis is that in the beginning, the commodity specialists were extremely negative, and the markets were very relaxed, and the commodity specialists were effectively saying you do not understand the consequences of this closure, and they were right. And so we went down for the first few weeks a period of realizing, I think, in market terms that there was a proper downside risk that was not being taken seriously. That this is a it's a big deal,

Understood. It is pretty interesting to me that even though the S and E 500 and the equity markets have been very resilient, if you look at the rates markets, they're pricing quite differently at this point. So what do you make of that?

Yeah. And and that that is striking. I think, you know, it was right from the start of this, but still true that when we look at the rate market, it's been striking that the market has worried more about hawkish central banks in response to this than about growth. And so we had some growth worry, but when we look at our measures, the kind of most of the growth damage that people have feared sort of over the medium term, we've unwound that in this relief. But what has stuck is the notion that central banks are gonna be significantly more hawkish than they were coming into this. Now some of that

So you think the market has swung a bit too far and shouldn't be anticipating rate hikes to the extent that it is?