In his latest note, Damodaran described markets as “playing an expectations game,” as investors attempted to process multiple layers of uncertainty, including the duration of the conflict, supply disruptions in oil, and the broader macroeconomic impact.
The result was a month marked by sharp swings in asset prices, but without the kind of disorderly selling typically associated with crises.
Oil becomes the central driver
The most immediate impact of the conflict was visible in crude markets. Brent crude prices surged 49.9% during March, while WTI rose 48.6%, as disruptions in Gulf production and bottlenecks at the Strait of Hormuz tightened supply expectations.
Damodaran noted that oil was the “lead player” in March, with its movements driving reactions across asset classes.
However, futures markets painted a more nuanced picture. While spot prices spiked sharply, longer-dated oil contracts rose less steeply, suggesting that markets view the shock as at least partly temporary, though with some lasting impact.
Inflation concerns reshape the narrative
The surge in oil prices quickly translated into higher inflation expectations, which then fed into bond markets.
The US 10-year Treasury yield climbed from 3.97% at the end of February to 4.3% by March-end, signalling that investors are pricing in more persistent inflation pressures.
At the same time, short-term rates remained relatively stable, indicating that markets are not yet expecting immediate policy tightening but are adjusting to a higher-for-longer inflation outlook.
Damodaran framed this as a shift in expectations rather than a reaction to confirmed data, noting that markets do not have the luxury of waiting for actual inflation prints.
Equities reprice risk
Despite the sharp macro shock, equity markets did not exhibit signs of panic, according to Damodaran. The implied equity risk premium for the S&P 500 rose from 4.37% to 4.77% over March, a modest increase of 0.4 percentage points.
“The surprise here is not that the equity risk premium rose, but that it rose so modestly,” Damodaran said, highlighting the measured nature of the adjustment.
Similarly, bond market stress indicators remained contained. Default spreads widened only marginally, and even lower-rated debt saw limited repricing.
Volatility, as measured by the VIX, rose from 19.86 to 25.25 during the month, but far below levels seen during periods of systemic stress such as the pandemic.
In another departure from typical crisis behaviour, gold declined more than 10% during March, while bitcoin posted gains, suggesting that investors were not rushing into traditional safe havens.
Damodaran summed up this dynamic as “much of the marking down in equity values can be attributed to real concerns and not the result of panic selling.”
“The uncertainties that manifested during March are still unresolved,” Damodaran said, adding that markets are still trying to piece together a coherent narrative. He outlined a wide spectrum of possible outcomes, ranging from a quick resolution that could see oil prices fall sharply to a prolonged conflict that could entrench inflation and slow global growth.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)