Assessing Market Impacts of Iran Airstrikes

Jeff Buchbinder (00:00):

<Silence> Hello everybody, and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague Lawrence Gillum. Lawrence, I guess as of Friday, we didn't think we'd be talking about Iran airstrikes, but here we are. So I guess we've changed our agenda a little bit from Friday, but we'll do our best to assess what the potential impacts are on the stock market and bond market in our discussion today. So, Lawrence, how are you?

Lawrence Gillum (00:32):

I'm doing well. And like you said, it's a busy Monday. Lots to talk about.

Jeff Buchbinder (00:37):

Oh, boy, is there, it seems like we say that most weeks, but I mean, the AI disruption story certainly continues. That's what really shaped markets last week. Although at the tail end of the week, certainly you could see in market behavior that there was anticipation of airstrikes. And certainly, you know, I saw it in terms of notes going around on trading desks on Wall Street, that anticipation was quite high. So, you know, not a shock that this has happened but still, anytime you see a major military operation, especially given what we saw over the weekend, it makes sense to be a little bit taken aback. And so, we'll try to put this in economic and market perspectives for you. But certainly the human element of this and the geopolitical element of this is really first and foremost, I think what's important, and then we'll wrap up of course with a week ahead.

Jeff Buchbinder (01:36):

And if there wasn't already enough going on, we have a really big week of economic data. It is Monday, March 2, of course, 2026 as we're recording this. And S&P 500 has rallied back into the green as we are starting to record. Bond market not so lucky, Lawrence. But you'll certainly help us kind of take the temperature on the bond market here and let us know what you think about where we go next. So let's start with the market recap here. Again, the AI disruption risk, I think, or just the selling of AI was really the biggest story last week. I mean NVIDIA was down almost 7%, even though their earnings were, by all accounts, excellent. The S&P 500 wasn't down much though, so, you know, you actually saw some dip buying in software, which has kind of been the center of the AI disruption scare trade.

Jeff Buchbinder (02:32):

You see here, tech still was down 2.2%. I mean, the weight of the rest of the Mag Seven including NVIDIA, of course, was too much to withstand. Then later in the week we got credit fears. So Lawrence, I'm glad you're on because you know, private credit and the risk that that AI disrupts bank loan portfolios and private credit portfolios, I think was probably the second biggest story last week before the airstrikes over the weekend. So you see financials down two, tech down a little more than two. And then the defensives, of course, including energy. Energy of course, is defensive as a geopolitical hedge because we're seeing oil prices up sharply today. I don't think anybody was too surprised to see that. Maybe actually people are surprised it's not up more. But yeah, energy is certainly a great place to hide out while this plays out.

Jeff Buchbinder (03:27):

So no surprise that energy did well along with the defensives. I'm not sure Lawrence, if it even matters kind of what the bond market did last week, because we've just reversed all of these gains or I think, I think all of these gains, you tell me. But the bond market did quite well last week, and I know some of the commentary you wrote was about just why the bond market had been doing so well, why were Treasury yields down 30 plus basis points from recent highs. So maybe start there, but then the big sell-off today, of course, is probably what people are most interested in.

Lawrence Gillum (04:06):

Yeah, for sure. So yep. So since the recent peak in Treasury yields call it February 4, the 10-year Treasury yield is down by about 33 basis points. Last week was a continuation of that AI obsolescence theme. So it seems like the Treasury market was the anti-AI trade, right? So as the credit markets and the equity markets were pretty volatile over the past week or several weeks the Treasury market was the haven asset that a lot of investors are used to. So it was good to see that risk off tone filtered into the Treasury market to push yields lower by about 33 basis points. So performance here to your point, Jeff, it's primarily rate driven. So we did see rates fall but yes, today we have seen a little bit of a reverse.

Lawrence Gillum (05:01):

The 10-year Treasury yield up is up about 11 basis points up above 4% again, so we're at 4.05 currently as we're taping this. There's concerns, and we'll unpack this a little bit more in just a minute, but concerns about higher oil prices, higher inflation expectations and then we got some economic data today too with the ISM manufacturing data that came in potentially or not potentially just came in hotter than expected, particularly the prices paid component. So a pretty big sell-off in the rates market hasn't completely offset that 33 basis point fall in yields that we've seen. But it has begun to reverse some of that positive price action that we've seen over the past month.

Jeff Buchbinder (05:44):

Yeah, this half a percent gain on the Ag was just the, you know, the last five calendar days doesn't include what's happening today, although in crude oil, it does actually. So here you see that jump in crude oil prices. I'll actually get a more up-to-date quote just to make sure. Well, actually, we're, now we're only up 5%, so probably not likely to be a 10% pop. Actually, this doesn't even rank very high historically in terms of biggest one day moves in oil. I don't even think it's in the top 50 right now based, you know, relative to recent history. So this is good news. It's good news that we got yields down before this bump up today. It's good that we got oil prices down before this bump up today. And now we'll just have to follow the events in the Middle East to see where we go from here. So I guess the other thing that maybe jumps out today, I mean, you'd expect precious metals to get a little bit of support, and they are, but the dollar is up, sharply, up almost 1% at at last check. So for those of you thinking the dollar was no longer a safe haven, wrong <laugh>, it is certainly a safe haven. And I don't think, you tell me Lawrence, but I don't think that's just people changing Fed rate cut bets.

Lawrence Gillum (07:06):

No, that's certainly a haven trade. You can you know, you can see the positive returns, again, out of the fixed income markets over the past week that, you know, that has helped with the dollar index as well. What's interesting though, is the Swiss Franc is down. Swiss Franc has tended to be one of those haven currencies as well. So that one, there's a lot of interesting things going on in commodities markets, the FX markets and the fixed income markets that maybe don't make up, you know, too much sense as it relates to kind of what's going on. But that's why we, you know, come to work every day. It's always exciting.

Jeff Buchbinder (07:42):

There you go. Maybe we got a little more excitement than we bargained for here today. Certainly I should have led with this, but certainly hope our brave servicemen and women come home safe after this operation. And we certainly hope it doesn't last more than a few weeks, which is the kind of the guidelines I think that Trump and Hegseth and the whole defense department are operating under. So here's your S&P 500 chart. The I mean, we've been talking about this being range bound for a long time and it certainly still is. I mean, the range recently has been really tight. I think 6,830 ish is kind of the low end of support right now. And let's see, we're at 6,886 at the moment, and that gives a little bit of cushion. Then you got some support in kind of the 70 6,730 range.

Jeff Buchbinder (08:39):

And then below that, I mean, you still got to go a ways down at least 5% down to get to the 200-day 6,564, and that also coincides with October and November support. So that is technically a pretty comfortable place to be. Adam Turnquist would tell you that the uptrend is certainly still intact. The other point I want to make on this chart, and the reason I gave you a different look this week is because I want to show you the drawdowns. We know what happened with the tariffs scare in April of last year, so-called Liberation Day, almost a bear market, down about 19. But look at since then, we have only had one 5% pullback and it was barely 5%, right? I think it was like, it was 5.1, I believe. So other than that, you know, we've just sort of bumped around a percent off the highs, 2% off the highs, which is about where we are now, I think maybe even close to three.

Jeff Buchbinder (09:35):

And that's it. Of course, when I ran this chart, it was, we were 1.9% off the highs. So this has been a very steady, stable market environment. Now, I like the duck analogy, calm over the surface, but, you know, paddling furiously underneath, that's what we've seen, right? We've seen this rotation underneath that has actually been pretty violent, but enough stuff is working to offset the stuff that is not working, that we are just sort of holding onto this range. That is a very positive development technically. So alright, well, let's move on. This is probably what you're most interested in, which is what we think the implications are of the airstrikes over the weekend. So at least from a stock market perspective and from an economic perspective, I would argue that what happens with the flow of oil through the Strait of Hormuz is the most important thing to watch.

Jeff Buchbinder (10:29):

In fact, we just put a blog up on lpl.com written by Kristian Kerr, our head of macro strategy. It's basically saying that watch oil, right? That is the market's assessment, essentially, of how much spillover you going to get, how broad this conflict will get, right? If the market thinks it's going to be short-lived and contained, and oil will, generally speaking, continue to flow through the Strait, which is by the way, where 20% of global oil goes, then you are probably not going to see oil prices go much higher than, you know, maybe the 82 where we just touched on Brent overnight. We're much lower than that now, but that is sort of the high, I think that is probably where the market is now, that scenario where oil mostly flows through the Strait, which by the way is important for China, there are certainly they don't want to be, but they're embroiled in this too.

Jeff Buchbinder (11:36):

If they can't get their oil from Iran and they buy most of Iran's oil, that's a big problem for them. So they're going to, we are going to do everything we can to make sure oil flows. So is China. We obviously seem to have more control over it right now than they do but that is a big part of this initiative for the U.S. So keep that in mind. Essentially oil has stopped flowing at least as of this moment, but the market clearly is comfortable that that is not going to last very long. So that's kind of where we are. If the market thinks this is a lasting blockade, you're going to have a different story. So I guess the next point I'll make here is that stocks historically have really shrugged these types of events off. We don't want to minimize the human element of this, but I mean, there are a lot of really major military and terrorist events on this chart.

Jeff Buchbinder (12:34):

I know it's noisy, but I'll just point you to the bottom, kind of the bottom line here. On average, these geopolitical crisis events stocks only go down about four and a half percent on it, and on that's an average. The median is 2.9%. That is hardly anything. Now, if you want to look at the worst drawdowns you see Kuwait, while we were basically already in recession, down 17% in 1990, and then 9/11, which coincided with a recession for reasons unrelated to 9/11, down about 12%. Of course, that got a lot worse in 2002 and early 2003 before we bottomed. That those are really the only events since 1950 where you've had a really significant drawdown in response to these events. So obviously there's uncertainty here. We don't know where this is going to go, but based on like all the information we have, we think it's very likely that this is just a pullback event.

Jeff Buchbinder (13:40):

Maybe not even a 5% pullback, maybe something even less than that. So I think this is a very positive message for folks who may be worried about the stock market effect and the economic effect. Again, the reason this, the reason the economy would be affected by this is through oil, and there just hasn't been enough of a move yet, or natural gas, by the way. European economy is more at risk than the U.S. economy because they have a lot of gas imports that are interrupted here. In fact, I haven't checked in the last few moments, but overnight we had about a 40% rally in European natural gas prices. That is significant. So less economic impact here because we are certainly energy independent. So that's kind of our take on the stock market. Again, uncertainty. But our base case is that this is, if it's anywhere near where I think most military strategists think it's going to end up, our best guess is that this will be sort of a market pullback, mini pullback and nothing, nothing much worse than that. So let's turn to fixed income, Lawrence. And you know, we alluded to it already, the Treasury market selling off really sharply on this. Sounds like it's maybe more than just oil prices but why don't you help us sort of assess where the bond market is on this news?

Lawrence Gillum (15:03):

Yep. So this is just a chart of the 10-year Treasury yield 10 days before a military campaign begins, and then 180 days afterwards. And what's interesting is that you tend to see a pretty predictable behavior in most of these military situations where you tend to see the bond market rally, rates lower, before selling off, you know, a little bit later, kind of call it 80, 90 days after the campaign begins. This one's a little bit unique in that we saw such a big rally over the past month, a 33 basis point fall in yields really put yields on the low end of kind of our expectations. So, you know, the sell-off is probably related to, you know, what we just talked about with oil pressures and the economic data, but there's also a valuation component in there too.

Lawrence Gillum (15:53):

So you know, the rally that we've seen out of the rates to market was pretty steep. You know, we don't typically see a 33 basis point fall in Treasury yields or 10-year Treasury yields in a month. So some of this is kind of call it repositioning and maybe this is exacerbating the sell-off today. But it is interesting or it is good to see though, that Treasury securities tend to be that haven destination during any sign, any of these uncertain events. We saw that initially on Friday. But of course, as we've talked about, we did see that, or we are seeing that reversed a little bit again today. But what comes next to your point, it really does depend on oil prices, right? So if oil prices move higher, significantly higher from current levels, you start to get into that scenario where maybe inflation expectations become unanchored which would push yields a little bit higher as well, a lot of uncertainty right now with, as it relates to oil. So that's what we're paying attention to in the fixed income markets as well. So yeah, the Strait of Hormuz is, you know, incredibly important to kind of the outlook for Treasury yields, at least in the near term.

Jeff Buchbinder (17:08):

Yeah, you can pretty much just look at the price of oil and probably tell what the market's assessment is of the conflict in the Middle East. So this is really interesting. I mean, first thing I do when I look at a chart like this is think about the events of the different years, right? And 2011 was really the heart of the European debt crisis. Yeah, right? And so economics and the aftermath of the GFC, the global financial crisis, 2008 and nine certainly were playing a big part in in the move in Treasuries during that time. So I think that's worth calling out but really, really interesting chart. So I guess this similar concept, how about on the high yield front where you would expect maybe more movement?

Lawrence Gillum (17:54):

Yeah, so these are high-yield spreads not as consistent or clean the message. You tend to see some erratic behavior. What really struck out to me is the decline in spreads high-yield spreads after, or at the start of the Iraq war back in 2003, I had to double check triple check these numbers to make sure they were right. But you saw this massive tightening of spreads you know, as the war was taking place. Part of that was we did see some pretty significant spread widening after 2001 and in 2002, so that was a reversal of some of that price action. So it's a little bit trickier to kind of look at history and suggest what will happen this time around. I will say though, that with spreads as tight as they are within the high-yield bond market.

Lawrence Gillum (18:41):

You know, it, I think there's an argument to say that we could likely see higher spreads from current levels. That wouldn't surprise me. You know, we're actually today as we've seen the equity markets rebound and equity prices higher, we're seeing credit spreads tighter. So again, a lot of these things that are maybe not consistent with history or, you know, that are a little bit surprising to see that you know, are taking place despite all the events that happened over the weekend. So but my expectation is wider spreads just kind of given the starting point with where spreads were. We were still around or, you know, at secular tights for some of these credit markets. So, you know, my expectation is maybe drift a little bit wider than current levels.

Jeff Buchbinder (19:33):

Yeah, we've been positioned very conservatively in our bond allocations, so that has certainly served us well in recent days. And you know, prior to the events over the weekend, what were we dealing with? We were dealing with AI risk in software. Now most people were following the equity side of that challenge. In fact, I think software was down 31% peak to trough recently. That is a big move. And in fact, based on how you measure oversold conditions with RSI, I think it was the most oversold it's been since the tech bubble burst, which is kind of crazy to think about. So you know, I guess the next level down is, well, if we're worried about these software stocks, maybe we should be worried about the bonds too.

Lawrence Gillum (20:25):

Yeah, for sure. And we are seeing a reaction out of various credit markets. So if you think about the corporate credit markets broadly, they go from the highest rated companies, the investment-grade corporate bond market, that's the bluish line there. And it goes all the way down to call it private credit markets, the direct lending market and everything in between. Really the markets that are most impacted, at least on the surface, because of these AI software obsolescence risks really lie in the bank loan and the private credit markets. So just this chart is looking at the kind of the relative yields of the tech sector relative to its respective index. Over the past couple of years, the tech sector, the investment-grade corporate tech sector has been trading at, call it a 20% premium to the index meaning spreads were tighter than the index.

Lawrence Gillum (21:21):

That's reversed a little bit. And now the tech sector is trading at par with the index. The yields are in line with the index for the tech sector. But what we've really seen is a big widening in the high-yield sector as well as the bank loan sector. If you've, I think if you flip the page, you can see the difference between those two sectors in particular. So the high-yield bond sector and the leveraged loan market sector, the bank loan sector, they do have software within the indexes, but it's much more pronounced on the bank loan side. The leveraged loan side leveraged loans, you have about, call it 16% within the, the loan market that is software and computer services related versus, call it 4% in the the high-yield bond index.

Lawrence Gillum (22:12):

What's even worse is if you look at the rating composition of the loan market broadly and the software and computer services, specifically, about 50% of those loans are rated B- or CCC, and those are the lowest ratings that you tend to see in the corporate credit bond market. So it's a very lower quality story out of the leveraged loan market's, why we're seeing yields and spreads move wider in that market versus the other market. The other thing that you know, that we're paying attention to is that within the bank loan market CLOs these collateralized loan obligations by 60 to 70% of these bank loans. And they're having to shed some of these assets because of downgrades and because of you know, these sell offs that are already taking place.

Lawrence Gillum (23:03):

So you tend to see this selling, begetting more selling, you know begetting more selling. So it's kind of a pretty stressed environment in the leveraged loan market. Our view for a while now really has been to keep our fixed income allocation up in quality. We've been avoiding the loan market and the high yield bond market because of valuation concerns. You know, there's and we just talked about spreads and spreads have really been priced to perfection for a lot of these lower quality markets. So we didn't know what the event was going to be, but you know, there always tends to be an event somewhere in the corporate bond market. So we've kind of stayed away from this market because of the potential for spread widening that we're seeing currently.

Jeff Buchbinder (23:50):

Yeah, boring is beautiful in fixed income, and it has been anything but boring lately. I'm sure you've seen some of the I hate to call it fear mongering, that may be a little harsh because AI disruption risk is real. But you're seeing some folks talk about 15% default rates. I mean that and or calling software the new subprime, right? That just seems a little bit <laugh> too far out there. What do you think?

Lawrence Gillum (24:22):

Yeah, I mean, you'll certainly see defaults pick up within the loan market. We've already seen loan defaults pick up a little bit. They're still manageable right now. But yeah, I think there was a sell side research shop that came out and said in a worst case scenario, you could see defaults within the loan market, within the software industry hit 15%. That would be pretty dramatic. And you know, I agree that would be a worst case scenario. I don't think that's a base case scenario, but certainly there are those risks out there. The other market that we're paying attention to, of course, private credit, private credit tends to have about 20% of their investments in software companies as well. And if you've watched financial news lately, you've seen a lot of these software company, or I'm sorry, these private credit stock sell off these BDCs, these business development companies sell off because of their allocation to software.

Lawrence Gillum (25:20):

You know, our advice has always been that, you know, we tend to get a little bit nervous when you have a vehicle that's very liquid like a BDC or a mutual fund or an ETF, and the underlying is full of illiquid instruments. So you know, we've been recommending kind of a cautious approach in that market as well. Just that liquidity mismatch tends to make us a little nervous at times. But there's more to come. Unfortunately, I do think that there's still more to come that this is not something that's going to figure itself out overnight or over the near term. So again, our advice is to stay up in quality and stay cautious.

Jeff Buchbinder (25:55):

Yeah, we certainly understand the AI disruption risk but it's, I think it's pretty clear to everybody on our team that the scenario, actually, I know it is <laugh>, the scenario that's laid out in this piece by Citrini Research that got all the attention last week is, you know, what, more than 10% unemployment because of AI disruption, that is quite extreme. And certainly not in our forecasts. We'll probably see a little bit of an uptick in unemployment in certain areas. And, but as we've done throughout history, we will reinvent ourselves as an economy and people will retool and shift to other roles. And that will certainly help mitigate the AI disruption. And by the way, you'll have a policy response too, which really I don't think was entertained in that piece. That can help mitigate the downside from AI disruption.

Jeff Buchbinder (26:54):

And clearly the market took a shoot first ask questions later approach, just taking everything down. And so it's really been nice to see a lot of bargain hunting in those areas over the last several sessions. And I think we'll probably continue to see that. So be selective. But certainly we think there are a lot of good opportunities where maybe the babies have been thrown out with the bath water in the tech sector. And certainly some of the more AI proof areas we think make some sense here. Maybe industrials and healthcare and energy, although it's maybe tough to buy energy right this moment after the surge, but we certainly think energy is AI proof as well. So oh, and by the way, we just wrote a piece on that too. I'll share that on social media about AI disruption and the impacts of that potentially on the equity side. So let's go to the week ahead, Lawrence. We got a ton of data. I mean, you already highlighted some that we got today that was really interesting especially that bounce in ISM prices paid, which I think, I think it was 10 points above expectations, if I'm not mistaken. What else here do you think is interesting for folks to follow? And, you know, do you think this is going to be enough to kind of reassure investors that the economy's doing just fine?

Lawrence Gillum (28:19):

Yeah, I mean, there's enough economic data this week to kind of give us a better picture of the economy, right? So of course, the ISM prices paid, you were absolutely right. It came in at, I think it was close to the 70 versus the 59 expected. So big beat on the prices paid tends to be, you know, somewhat thought of as inflationary. So that's again, why we're seeing higher yields today. The jobs report is always important, so we'll get that on Friday. The expectations is what a 70,000 increase in jobs. Watch revisions. You know, last month we had 172,000 job reports came in way above expectations. So we'll have to see if that sticks or not. But then you throw in retail sales and some more ISM data, and it could be a pretty volatile week out of the rates market.

Jeff Buchbinder (29:11):

Yeah, we know from Dr. Roach that revisions have been more negative lately, so I would not be surprised if we saw that last data point revised down. I also, I mean, it's very dangerous for an equity strategist to try to predict economic data <laugh>, but given the weather, I do know about the weather, Lawrence, living in Boston, and I can tell you that it was disruptive. So I think that is probably going to cost some folks to take the under on the job market. But please don't, don't hold me to that, that is just kind of my personally personal bias. But I do think this economic data can help the market get more comfortable with the AI disruption with each passing month as we see the job market hold up. I mean, we'll get press releases every now and again with companies doing layoffs.

Jeff Buchbinder (30:05):

Certainly, Block was the big one last week laying off, I think it was 40% of their workforce. Probably not going to see a lot of those, but we'll see some layoff announcements, certainly, that is to be expected. There's probably still a little bit of digestion off of the hiring during COVID, and so there's a little bit of reallocating and rightsizing going on, more so than just saying, you know what, we're going to fire a bunch of people because we can replace them with AI. There's some of that, but we don't think that's going to be the sort of overarching theme of the job market over the next several months. This is going to take time to play out, probably it'll be more gradual. So I think it'll be good to see job reports come through to help assuage those fears of mass job loss from AI. So I think we'll go ahead and end there, Lawrence, unless you have any closing remarks, we'll just again, say thank you to our servicemen and women overseas. Stay safe.

Lawrence Gillum (31:05):

Yeah, exactly. I would echo that completely. Stay safe.

Jeff Buchbinder (31:09):

Yes absolutely. I'll say this, we'll write a letter for LP advisors to send out here over the next day or so, but, and I'm not being Pollyannish here, but there is a real possibility that the world is a lot safer several months from now than it is today. So hopefully it doesn't take more than that. Maybe it's longer. But on the other side of this, I think there's a real opportunity for the world to be a safer place, and that is no doubt positive. So I'll end on that upbeat note. Thanks everybody for listening to or watching LPL Market Signals. We greatly appreciate it. And thank you, Lawrence, for joining. Really, really great stuff on the fixed income markets. I guess we're kind of learning why maybe want to keep your fixed income allocations fairly conservative when valuations are really high.

Jeff Buchbinder (32:06):

That has certainly served us well here lately. And I think will continue to serve us well. And on the equity side, certainly we think the best actions, probably no action but if you're maybe under hedged in some of these areas that are really working today, might not be a bad idea to maybe add a little bit of exposure there. We're talking about energy, precious metals, defense, alternative investments things like that can make a lot of sense to just sort of cushion portfolios as we go forward. Because of course, we don't know how this is going to play out. So with that everybody have a wonderful week and thank you again for listening to LPL Market Signals. We'll see you next time. Take care.