Ed Yardeni Sees a 'Short War' and a Buying Opportunity in Stocks

2:59 PM Friday. Make this trade. (Timothy Sykes)

So here's a thought: what if the scary geopolitical event that's got everyone watching the news turns out to be... not that scary for markets? That's essentially the case veteran strategist Ed Yardeni is making.

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In a recent interview, the president of Yardeni Research laid out what he calls a "short war scenario" for the current conflict involving Iran. His take? It could all be over in a matter of weeks. "Iran has lost, however, they haven't realized that yet," Yardeni said, adding that their military command system has been "annihilated."

In his ideal—and admittedly optimistic—outcome, the war wraps up within a month. That could trigger a regime change in Iran, new policies, and a meaningful drop in the geopolitical risk premium that's been hanging over the Middle East for years. It's a best-case scenario that would make a lot of investors breathe easier.

Of course, the path of war is never straight, and Yardeni maps out the very different forks in the road for the energy market and the economy.

In his short war scenario, he projects oil prices would "plummet sharply" due to a surplus. The fear premium evaporates, and crude gets cheaper. The flip side is grim: if the conflict drags on, or if Iran morphs into a persistent terrorist state, it could keep threatening the global economy. A drawn-out war could spike oil prices, potentially re-igniting inflation and even tipping the economy into a depression.

That latter path would put the Federal Reserve in a terrible bind. They'd be stuck trying to balance hiking interest rates to fight inflation against cutting them to stimulate a weakening economy. It's the kind of policy nightmare central bankers have nightmares about.

So, with all this uncertainty, what's an investor to do? Yardeni's advice is straightforward: stay with stocks. He suggests that some of the market sell-offs driven by war fears could actually present buying opportunities. It's a classic "be fearful when others are greedy" play, but applied to geopolitics.

Yardeni's predictions land as the market's initial reaction has been, in the words of Goldman Sachs Chairman and CEO David Solomon, surprisingly "benign." Speaking at a business summit, Solomon noted it might take a few more weeks for markets to fully digest the short- and medium-term implications of recent events.

The relative calm was tested on Tuesday when major indices dipped: the Dow Jones Industrial Average slid 0.83%, the S&P 500 shed 0.94%, and the Nasdaq Composite closed 1.02% lower. Markets found a brief flicker of hope after former President Donald Trump announced a U.S. plan to offer insurance for tankers in the Persian Gulf, aimed at restoring traffic through the critical Strait of Hormuz.

That strait is the whole ballgame for oil. Analysts at JP Morgan have warned that a prolonged closure could drastically cut crude supplies from Iraq and Kuwait within days. They estimate a potential cut of 3.3 million barrels per day by the eighth day if the strait stays shut. For context, WTI Crude futures were last seen trading 0.56% higher at $74.94 a barrel.

The story here is about two very different futures. In one, the war ends fast, oil tanks, and stocks rally on receding risks. In the other, it drags on, oil soars, and the Fed faces an impossible choice while the economy stumbles. Yardeni is betting on—and advising investors to position for—the first one. The market, for now, seems to be waiting to see which script it's reading from.

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