Why investors should avoid looking for a market bottom in wartime

The Feb. 28 U.S. and Israeli attack on Iran pushed benchmark crude to nearly US$120/bbl and sent U.S. stock volatility to more than 10-month highs; the S&P 500 and S&P/TSX were about 3–4% below recent record highs. A survey shows U.S. risk appetite at its lowest since Sept 2025, and Oxford Economics warns that high energy prices, Iran-war uncertainty and private credit risks could keep equities under modest pressure. Financial advisers recommend staying invested and using disciplined rebalancing (e.g., annual checks or ~5ppt thresholds) rather than attempting to time the market.

Analysis

Recent risk-off ripples should be read as a liquidity-and-positioning event more than a pure fundamentals shock: dealer gamma and hedging flows will amplify directionality for several sessions, creating asymmetric price moves that are tradable even if the fundamental story reverts. Expect realized volatility to remain elevated for 2–6 weeks as systematic rebalancers and retail DCA investors collide with discretionary funds that reduce equity exposures; this creates cheaper, short-dated protection and richer implied vol for near-term expiries.

Credit and private-credit linkages are the highest‑probability second-order channel into market stress: mark-to-market hits in leveraged credit vehicles can force selling into otherwise liquid equity and oil markets, compressing breadth and lifting correlations. That process is path dependent — a bout of funding stress over 1–3 months forces more deleveraging than a one-day price spike — so monitor secondary credit spreads and bank funding metrics as leading indicators.

Emerging markets and commodity‑linked balance sheets are the likely asymmetric losers if the USD and real rates rerate higher; exporters with short FX duration and fixed‑rate external debt see survivable revenue hits but outsized debt-servicing pain over 6–12 months. Conversely, integrated energy names with large downstream exposure remain operationally resilient and offer shorter, tradeable convexity to sustained energy-price regimes; pair these with short-duration volatility hedges to limit tail risk.

Key Decisions for Investors

• Buy short-dated equity tail protection: purchase a 3-month SPX put spread sized to cap portfolio drawdown to ~5% (example: buy 1 5% OTM put / sell 1 10% OTM put). Target cost ~0.5–0.8% of notional; payoff 6–10x if SPX falls 8–12%. Exit/roll if realized vol normalizes and premium <0.25% or after 3 months.
• Directional energy exposure: overweight XLE by 2–3% of AUM for 1–3 months as a cash-secure carry trade — set a tactical stop at -8% absolute on the tranche and a take-profit at +25% (or hedge by selling short-dated call spreads to finance). Rationale: captures producer margin re-rate while limiting allocation size if oil mean-reverts quickly.
• Volatility asymmetric hedge: buy a 1-month VIX call spread (long lower strike / short higher strike) sized to 0.5–1% of AUM and roll monthly if realized vol stays >20. Expected payoff skew: small known premium vs large payout on continued dislocation; avoid leveraged ETNs with path decay.
• De-risk EM and credit tails: tactically reduce levered EM FX/debt exposure by 50–70% and initiate a 3–6 month short on EEM (size 1–2% AUM) while funding with a small long TLT position (1% AUM) as a crisis hedge. Stop/flip if EM policy response (capital controls/swap lines) materializes or if Brent falls sustainably and global funding tightness eases.