Key insights
- Geopolitical tensions between the US and Iran are driving oil prices higher, increasing inflationary pressures. This reduces the likelihood of the Federal Reserve pausing rate hikes and slightly increases the probability of a rate hike in April. The author questions whether 'buying the dip' is justified given the difficulty of pricing geopolitical risks and the potential for further escalation.
Escalating tensions between the US and Iran have sent oil prices soaring and markets volatile. I've noticed many people talking about buying the dip these past few days, and while this has indeed been successful many times in the past, I feel conflicted.
Iraq declared force majeure on its oil fields. The Strait of Hormuz has become a true choke point.
Rising oil prices imply inflationary pressures. The likelihood of the Federal Reserve pausing rate hikes has decreased, while the probability of a rate hike in April has slightly increased.
Nobody knows whether the situation will ease or worsen next week.
Buying the dip assumes the market has already priced in the worst-case scenario. Geopolitical factors cannot be simply incorporated into valuation models.
I'm not saying the market will crash. I'm just asking:
Are you buying because the risk-reward ratio is reasonable? Or are there other factors driving you?