Are Investors Prepared for ‘More Violent and Frequent Shocks’ This Year?

Key Takeaways
The S&P 500 could fall 10% to 15%, Ed Yardeni of Yardeni Research said.Investors should brace themselves for “more violent and frequent shocks” to the global economy this year, according to Allianz chief economic advisor Mohamed El-Erian.

Stock-market jitters are back. But some experts think investors aren’t jittery enough.

Broad market indexes declined to start the week, with the Dow and the S&P 500 in the red as U.S. crude prices surged past $100 per barrel. A market gauge that measures investor sentiment known as the Cboe Volatility Index, or the VIX, briefly kissed the 30 level—a reading indicating fear—for the first time since April, when global stock markets crashed on the heels of the Trump administration unveiling its trade policy. CNN’s Fear & Greed Index recently pointed to “extreme” fear.

For all of the negative and potentially lasting implications of a prolonged war in Iran, investors appear largely convinced—as measured by major banks clients’ equity positions—that the dislocation in U.S. stocks will prove fleeting. Some market experts, however, say investors aren’t pricing in the possibility of outcomes like a correction in U.S. stocks or a recession.

WHY THIS MATTERS TO YOU

Investors appear to have become accustomed to brief stock market shocks, which may lull them into a false sense of security at exactly the wrong time.

“Overall equity positioning in our reading has dipped slightly below neutral,” Deutsche Bank’s research team including Parage Thatte and Binky Chadha said in a research report on Friday. “A profusion of shocks in the last 4 years,” they wrote, “has inured investors into not reacting to potentially short-term disruption.”

On prediction markets, there’s some caution—but not outright fear in stocks. Polymarket bettors place the highest probability, or about 74%, on the S&P 500 ending the month at above 6500, implying a less than 5% decline from recent levels.

Investors appear to be placing an 80% probability that the global economic shock will be “temporary and reversible,” Mohamed El-Erian, chief economic advisor of Allianz, said on CNBC Monday morning. He puts those odds at 50%, saying that the global economy is likely to be subject to “more violent and more frequent shocks” this year.

DataTrek’s Nicholas Colas and Jessica Rabe in a note yesterday said “oil prices are the lynchpin to the market,” and that historically crude prices quickly doubling has meant that “a recession is usually not far behind.”

The implications of supply-chain disruptions appear to be underestimated. Westwood CIO of multi-asset strategies Adrian Helfert in a note Monday said the closure of the Strait of Hormuz threatens food and fertilizer supplies. Roughly one-third of the world’s fertilizer and almost half of globally exported urea, a high-nitrogen fertilizer, moves through that channel, he said, which would “disrupt spring planting” across major agricultural economies.

Ed Yardeni of Yardeni Research last week said there could be a 10% to 15% pullback in the S&P 500, with the latter occurring in the event the Islamic Revolutionary Guard Corps is successful in using drones and speedboats to effectively block the strait.