US stocks sold off Tuesday as investors confronted a sharp jump in oil prices, rising bond yields and mounting uncertainty around the scope and duration of the war with Iran — a mix that is forcing advisors to revisit near-term risk in client portfolios.
The Dow Jones Industrial Average was down about 570 points midday Tuesday, or roughly 1.2%, after being off more than 1,200 points at its intraday low. The S&P 500 lost around 1.3% and the Nasdaq Composite slipped 1.4%, with both benchmarks at one point trading more than two and one-half percent lower before trimming losses. Small caps bore the brunt of the move, with the Russell 2000 sliding nearly 2% in midday trading and cutting its year-to-date gain to about 5%.
Equity investors faced a sea of red as broad-based selling ripped across sectors. All of the S&P 500’s major groups were in negative territory during Tuesday’s session, with the exception of relatively stronger showings in energy, financials, and real estate. Cyclical areas such as materials, industrials, and consumer discretionary led the declines as markets digested the odds of higher oil prices and borrowing costs squeezing growth. Several large technology names that had helped fuel Monday’s intraday rebound – including Nvidia, which recently posted a blowout year– reversed lower, and US memory-chip makers came under pressure following steep drops in South Korean peers.
Beyond equities, brent crude surged about 6% to trade above $82 a barrel, extending a roughly 6% spike the previous session. West Texas Intermediate crude jumped a similar amount to move past $75 after another 6% gain Monday. In futures markets, front-month WTI contracts were up more than 9% near $77.80, while Brent climbed about 9% to roughly $84.80.
The move in energy fed quickly into fixed income. The 10-year Treasury yield climbed to about 4.11%, while the 2-year yield pushed up to roughly 3.57%, reversing some of the rate relief that had supported risk assets in recent weeks. The CBOE Volatility index, Wall Street’s so-called fear gauge, spiked by more than four points to around 26, its highest level since November, signaling a shift toward a more defensive stance.
Read more: Markets shift into defense mode as Iran conflict jolts oil, equities and trading oversight debate
“Risk-off is the operative word as investors are now second-guessing how long this war with Iran is going to last and, in the interim, how much damage what is left of the leadership (quite a bit, apparently) can inflict on the oil (and gas) markets,” wrote David Rosenberg of Rosenberg Research. He added that it is “not the time yet … to be buying any dips,” arguing that volatility may need to move substantially higher before long-term buyers step back in.
Geopolitical headlines continued to undercut the “buy-the-dip” narrative that briefly re-emerged Monday, when major indexes clawed back steep early losses and, in some cases, closed little changed. Fresh reports of Iranian drone strikes on the US embassy in Riyadh, warnings from Iran’s Revolutionary Guard that the Strait of Hormuz was closed and that any ships attempting passage would be set ablaze, and State Department evacuation orders for personnel in Bahrain, Iraq, and Jordan all fed into investors' collective reassessment of how long the conflict could last and how disruptive it could be for crude flows.
The selloff is landing on top of an already fragile backdrop in growth-oriented segments of the market. February marked the Nasdaq’s weakest month in nearly a year, with the tech-heavy index down more than 3.3%, while the S&P 500 slipped roughly 0.8%. Concerns around the durability of the AI trade, a hotter-than-expected Producer Price Index reading for January and rising unease over private credit risk have all weighed on sentiment, even as Nvidia’s strong earnings failed to arrest a pullback in information technology shares.
Some allocators are counseling clients to separate short-term market repricing from longer-term fundamentals. As oil, bond yields and equities moved in tandem this week, Northlight Asset Management chief investment officer Chris Zaccarelli noted that markets need to “reprice in real time,” but argued that longer-horizon investors should consider whether “there is an opportunity for them to put cash to work in a way that is consistent with their risk tolerance and time horizon” if equity markets experience a substantial pullback.
Brent Schutte, CIO at Northwestern Mutual Wealth Management Company has also urged against panic selling, instead encouraging any investor who would listen to lean on diversification and a long-term outlook.
"We believe that as markets broaden beyond a few narrow leaders, diversification will serve its traditional role in risk management while potentially enhancing returns," Schutte said. "We expect previously underinvested areas of the U.S. and global markets to provide stronger relative performance moving forward."
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