War/Conflict

Investors should reduce risk, increase allocation to safe havens, and brace for oil price volatility and supply disruptions stemming from the Middle East over the next zero-to-12 months.

Stronger US growth elicits a response from the House Republicans. But a government shutdown is not devastating to the economy. What is more devastating would be a crisis in the Middle East, Europe, and Asia. Stay long US defense, energy, and large caps stocks.

Investors underestimate the likelihood of the war in Israel spilling outside of Gaza, and engulfing wider swaths of the Middle East, endangering energy supplies. Stay overweight Energy and Aerospace & Defense.

The Israeli-Arab crisis is more likely to expand and cause oil disruptions than market consensus holds. Close long dollar trades and go long energy and defense stocks relative to cyclicals.

Volatility will remain the key dynamic in oil markets in the aftermath of the surprise Hamas attacks against Israel on October 7. The risk of a major oil supply shock has gone up, but meanwhile supply constraints will remain at variance with global growth problems stemming from restrictive monetary policy over the next 12 months. Favor bonds over stocks, large caps over small caps, defense and energy stocks over other cyclicals, and US equities relative to global equities.