What's The Risk Level?
In China: At this point, the risk of steeper oil prices remains just that—a risk—but it’s one that the Chinese government has to take seriously. China will no doubt attempt to support its market and economy in multiple ways. Unfortunately, there’s very little that can be done in the short term to offset that risk. The challenge China faces just got even tougher.
In Europe: The European recovery, although real, may be more exposed to the Middle East than most investors think. A new major risk factor has just forced itself on our attention.
In the U.S.: Here, the risk is much less. We’re less exposed to higher oil prices on a relative basis and have a better-established recovery under way. Direct exposure to China is limited, and the domestic energy sector would actually benefit from higher prices, offsetting any negative effects. Indeed, higher energy prices could act as a tailwind for the stock market, bringing the energy sector back to life. This isn’t to minimize the potential risk but to highlight that the U.S., once again, is in a relatively superior position compared with the rest of the world.
That said, we should keep in mind that the risk extends beyond the Saudi Arabia/Iran confrontation. That conflict is very likely to be dialed back, although the problems driving it will most certainly surface again. More worrying is that the Islamic State may create an even worse, and less controllable, situation.
As investors, we have to expect that such volatility may continue.
Brad McMillan is the chief investment officer at Commonwealth Financial Network. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.