If you’ve felt like the market has been bouncing around lately, you’re not imagining it.

One day it’s a potential new deal with Iran, the next day it’s no deal. Then, talk of a ceasefire, followed by reports that the conflict could escalate again. Markets have been reacting to every headline because those headlines move one thing that matters a lot: oil.

A client reminded me this week of something I said years ago: most recessions start after a spike in oil prices.

That’s because oil touches almost everything in the economy. Higher oil prices increase transportation costs, manufacturing costs, shipping costs, and ultimately the price consumers pay for goods and services. If oil rises enough and stays higher for long enough, it acts like a tax on the economy, slows growth, and can eventually contribute to a recession.

The flip side is that higher oil prices are generally good for oil producers, Alberta, and Canada. That’s one reason we continue to believe investors shouldn’t ignore the energy sector. In fact, during periods of geopolitical stress, energy stocks can provide a measure of protection because they often benefit from the very events that are causing uncertainty elsewhere in the market.

We’re not hoping for higher oil prices or an extended conflict. We’d much rather see stability return and the uncertainty surrounding Iran move into the rearview mirror. But, as investors, it’s important to recognize that diversification isn’t just about owning different stocks – it’s about owning assets that can behave differently when the unexpected happens.

Sometimes, the best insurance policy is owning a little of what everyone is worried about.

I have also included a piece from our CIBC Economics team entitled “AI investment: Are we overestimating short-term prospects?”.

As always, if you have any questions, please feel free to give us a call at any time.

Have a great weekend.

Milan