Middle East Could Tip Stocks to Bear Market

Wednesday, 19 Jun 2013 07:37 AM

By Michael Carr

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The stock market seems to be looking for a reason to go down, and turmoil in the Middle East, which has led to bear markets in the past, seems destined to cause another drop in stock prices.

Market veterans once thought of the 1973-74 bear market as the worst decline since the Great Depression. Since then, the Internet bubble in 2000 and the global financial crisis of 2008 make that downturn seem like a minor pullback on long-term price charts.

In 1973, the cause of the crash was easy to understand. An oil embargo in October 1973 pushed the price of oil from about $3 a barrel to $12 and sent the Dow Jones Industrial Average down 20 percent in less than two months.

Even when the reason behind a market decline is understood, it may still be unavoidable. Revolution in Iran and the rise of Ayatollah Khomeini in 1979 took the price of oil from about $16 a barrel to nearly $40 as the Dow suffered a double-digit loss.

Less dramatic examples of stock market declines include oil spikes at the beginning of both Gulf Wars.

Once again, tensions are mounting in the Middle East. Syria could be at a tipping point despite U.S. efforts to extend the conflict by finally choosing a side. Iran selected a moderate president to lead their transition to a regional power with nuclear weapons. And Turkey is joining the list of states with problems in a region with little stability.

Oil could move back above $100 a barrel on news from the Middle East, which could push gasoline back above $4 and trigger a recession. Stock prices could quickly fall 10 percent or more. As traders realize the long-term nature of the problem, selling could accelerate.

Watching the news from Middle East, now could be an ideal time for taking profits in the stock market.

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