Bank of America Securities analysts said in a research note Monday that they believe geopolitical shocks should be bought, not sold.
The bank is constructive, however, they note that further escalations in the Middle East could evolve into a tail risk.
Furthermore, BofA states that a previous war in the region fueled the second inflation wave in the 1970s, and “stagflations have historically been accompanied by oil shocks,” which is a rising bear case for stocks.
“Geopolitical events with limited fundamental implications have historically offered buying opportunities,” wrote the investment bank.
“Stocks more than fully recovered within three months – history suggests that geopolitical dips should be bought, not sold,” they add.
To hedge, the BofA derivatives team likes VIX calls and long-dated SPX puts. “Between Yom Kippur War and peak in energy inflation (1973-74), the S&P 500 fell 32% with all 11 sectors down,” said the bank. “Materials & Energy were the best sectors, while Cons. Disc. was the worst. Gold gained 54%.”