Iran: How oil & inflation's 'nightmare scenario' could occur

Stocks are holding on to narrow gains as investors await a response from Iran after the US preemptively struck three nuclear facilities in the country over the weekend. According to a note from Michael J. Wilson at Morgan Stanley out this morning, market response is typically limited following a geopolitical strike. But, if Iran's National Security Council follows through on its Parliament's votes to close the Strait of Hormuz, the oil prices, yeah, they could spike. Joining me now in studio for the show, we've got Jay Woods, Freedom Capital Markets chief global strategist. And for more on geopolitics, we've got Russ Mould, who is the AJ Bell investment director. Great to have you both here with us today. Jay, thanks for joining us throughout the show here. You know, as we continue to evaluate some of what we're seeing in the early market reaction. Of course, we were seeing this play out in the futures over the weekend after the US struck some of the nuclear facilities in Iran. And then now, we're seeing some of the early market action here on the day. Jay, just want to get your evaluation.

Yeah, a little surprised that we're shaking this off. Uh, this market continues to climb this wall of worry. And after watching the futures open and seeing oil spike almost 5%, I was flipping back and forth from Philly's Mets to check the futures all night. Uh, waking up to see us kind of calming, and now nine of 11 sectors up for the year, all 11 up for the day. A little head scratching, but uh, kind of a relief. We're still waiting to see what the reaction is out of Iran. But for the market to shrug this off, I'll be honest, it's a little surprising.

From head scratching into strategy, you know, Russ, I I wonder what you're kind of sifting through in terms of the data to really inform what that strategy looks like on today's activity, and then even further looking out into the future, if we were to see a prolonged type of conflict and events to play out.

Yeah, I think that's what a lot of people are wondering about is if we did get a sustained increase or widespread conflict, and there were to be say escalations, which could lead to a sustained spike in oil, that'll be perhaps when the worries about inflation would resurface, starting to put perhaps some pressure on consumer wallets and purses, particularly through the petrol forecourts and energy bills. Again, where I think perhaps one of the reasons why Jay and I are pleasantly surprised is that we're not seeing that immediate oil spike. So I guess the big worry would be if we got that later. You know, that the nightmare scenario would be returned to the 1970s when you saw two big oil price spikes, galloping inflation and and interest rates shooting higher. I guess one big difference between now and then is that America is way more self-sufficient in oil and hydrocarbons than it was then. And another is that relations with Saudi Arabia seem to be an awful lot better than they were then. So there are some potential similarities and echoes, but some big differences as well.

You know, just to follow up on that, and and there's the the question internally here, as as we've been evaluating here at Yahoo Finance, is whether or not there is just so much of the optimism that investors are really trying to latch onto right now that even when there are very present risks, is there more of kind of this this melt-up reality that we might see play up regardless? Russ, I'll go to you on that first.

It it it certainly, if you're a bear, you're having a very, very difficult time of it right now. I think if we'd started the year and you said that we'd walk into, you know, some fairly spiky tariff and trade discussions between the world's largest economy and many of its trading partners with just one deal done so far, not two or three, and we'd walk into, you know, ongoing conflict in in in Eastern Europe and an escalation in the Middle East, I think most people would have been extremely pleasantly surprised to see market, equity markets where they are. Uh and perhaps perhaps less surprised to see gold where it is, but equally pretty stunned that oil perhaps hadn't done more.