Good morning, investors. Tensions in the Middle East remain high and the conflict has yet to show signs of cooling.

None of that, however, seemed to matter for asset allocators as stock markets around the world staged a furious rebound on Wednesday.

Easing oil prices likely were not a coincidence.

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Bottom stocks, top oil

Oil prices hold the key to when the stock market is about to rebound.

History suggests investors should pay more attention to global crude levels than war headlines.

During major Middle East conflicts, equities tend to bottom the same day that oil prices peak, suggesting that energy markets are the clearest signal for an inflection in stocks. 

Indeed, crude prices hit a one-year high on Tuesday while stock markets around the world tumbled. 

Then on Wednesday, oil inched lower and stocks bounced back. 

To be clear, that’s not to say the turmoil is over. Missiles are still flying in Iran and uncertainty remains high.

Yet if stocks did stabilize from here, it would match the historical pattern.

In a note to clients, DataTrek Research highlighted the oil shock over three decades ago as an analog for today.

When Iraq invaded Kuwait in August 1990, crude prices skyrocketed and stocks fell sharply, with investors repositioning for the economic fallout of higher energy costs.

From August 1 to October 11 of that year, West Texas Intermediate crude rose about 90% while the S&P 500 dropped 17%. 

As it turned out, though, October 11 marked both the high for oil and the bottom for stocks. 

Over the next five months, oil prices fell more than 60% and the S&P 500 climbed roughly 25%. 

“During periods of widescale military conflict in the Middle East, oil prices and US equities trade in virtual lock step,” wrote DataTrek co-founders Nick Colas and Jessica Rabe.

Complex as the geopolitics of the Middle East may be, the portfolio signal is surprisingly straightforward, according to history.

Rather than looking for stocks to bottom when a war ends, investors should pay more attention to the moment oil prices stop rising. 

The logic can be pulled from the pocketbooks of the average household.

When the cost of energy spikes, it’s taken as a tax on consumers, sapping discretionary spending and fueling recession fears. 

Once that momentum reverses, it’s like the breaking of a fever — markets can suddenly look past the fog of war to focus back on earnings and fundamentals.

“Oil prices signal the lows for stocks, not the ebb and flow of military activity,” Colas and Rabe said.

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🗓 March 5, 2009: The Bank of England cut interest rates to 0.5% and launched its first quantitative easing program, announcing plans to buy £75 billion in government bonds.

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