The market is obsessed with the wrong things

Many moons ago, a mentor of mine shared with me what really moves markets. Like a child being told that vegetables are good for them, it went in one ear and out the other. It’s not that I disagreed, but I was too busy reading the day’s headlines or building DCF models to truly understand.

At the time, which was during the GFC, the headlines felt like the market. Spend five minutes right now scanning financial news and you’ll come away with a similar impression: markets are being driven by war and energy prices.

Oil spikes dominate the conversation. Geopolitical developments are framed as pivotal turning points. Every escalation is treated as a potential market catalyst. It all feels important. It all feels urgent. Critically, it is also largely missing the point.

The lesson I was given back then is the same one many investors continue to overlook today. These events may capture attention, but they are not what ultimately drives asset prices over time. They are inputs, not outcomes. 

The variable that matters most, the one that sits beneath every valuation, every allocation decision, and every portfolio outcome, is interest rates.

The price of money. That's what determines everything. 

That has always been true, and it remains true today.

The force beneath everything

At its core, investing is an exercise in discounting the future. Every asset, whether it is a government bond, a growth stock, or a piece of infrastructure, is valued based on the present value of future cash flows. And the rate used to discount those cash flows is derived, directly or indirectly, from the risk-free rate.

That alone would make interest rates important. But their influence runs much deeper.

They determine the cost of capital across the economy, shaping borrowing decisions for households and businesses alike. They influence the relative attractiveness of risk assets versus cash. They drive currency movements through rate differentials. And they underpin financial conditions globally, setting the tone for liquidity, leverage, and ultimately risk appetite.

In other words, when interest rate expectations shift, everything shifts with them. This is why markets often appear disconnected from the headlines. Investors may be focused on the immediate cause, but markets are pricing the second-order effect. The question is never simply what has happened, but what it means for policy.

How markets actually process shocks

War and energy shocks matter, but not in the way they are typically framed. They matter because of what they do to inflation, and inflation matters because of what it forces central banks to do. 

It is that reaction function, not the event itself, that drives markets.

The chain is straightforward. A geopolitical shock pushes energy prices higher. Higher energy prices feed into inflation expectations. Central banks respond by tightening policy or delaying easing. Interest rate expectations move higher. Assets reprice.

By the time the market reaction becomes meaningful, it is no longer about the war. It is about the path of rates.

History provides myriad examples

The inflation of the 1970s is often attributed to oil shocks, but inflation pressures were already building before energy prices surged. The defining moment came later, when Fed Chair Paul Volcker pushed rates to extraordinary levels - peaking at 20% in June 1981- to restore credibility. That policy shift, not the oil price itself, reshaped markets.

Fast forward to 2008, and the pattern repeats. The global financial system fractured under the weight of leverage and poor credit quality, but markets did not stabilise because the headlines improved. They stabilised when the Federal Open Market Committee cut rates to near zero and provided a liquidity backstop.

The same was true in 2020. Markets fell sharply as the pandemic unfolded, but the turning point came with the policy response. Rate cuts and liquidity support restored confidence and reset the pricing of risk.

Perhaps the cleanest example, however, came in 2022. Oil surged, geopolitical tensions escalated, and yet the defining market move was the repricing of interest rates. Real yields rose sharply, equity valuations compressed, credit spreads widened, and the US dollar strengthened. Oil peaked early in the cycle, but rates continued to move, and markets followed.

Where we are today

That same dynamic is playing out again. In the United States, the Federal Reserve has paused, but it has not pivoted. The message from Chair Jerome Powell has been consistent: inflation remains a risk, and policy is likely to stay restrictive until there is greater confidence it is under control. The projected path of rates suggests a gradual easing cycle, not a rapid shift lower.

In Australia, the Reserve Bank of Australia has taken a similarly cautious stance, lifting the cash rate to 4.10% and signalling a willingness to act again if inflation pressures persist. Importantly, the RBA has explicitly linked recent developments in energy markets to inflation risks, and from there to the path of interest rates.

That linkage is the key insight. The central banks are not reacting to the war itself. They are reacting to what it means for inflation, and therefore what it means for policy. Markets are doing the same.

The real debate investors should be having

When stripped back, the current market environment can be reduced to a single question:

Where do interest rates settle, and how long do they stay there?

Everything else will flow from that. If rates remain higher for longer, the implications are clear. Equity valuations face ongoing pressure as discount rates stay elevated. Bond markets must contend with the risk that yields have not yet peaked. Credit markets become more vulnerable as refinancing costs rise. Currency movements continue to reflect rate differentials, reinforcing global financial conditions.

If, on the other hand, growth slows and inflation recedes more quickly than expected, the path opens for earlier and more aggressive rate cuts. In that environment, duration becomes attractive, equity multiples can expand, and risk assets generally benefit from easier financial conditions.

These are fundamentally different worlds. And yet, the dividing line between them is not oil, and it is not geopolitics. It is the path of interest rates.

A more useful way to think about markets

None of this is to suggest that geopolitical risks or energy markets should be ignored. They matter, and at times they can dominate short-term price action. But their importance lies in how they feed into the broader macro framework, not in their ability to drive markets independently over sustained periods.

For investors, the takeaway is fairly simple. Time spent trying to interpret every headline is often less valuable than time spent understanding how those headlines might influence central bank behaviour.

That requires a shift in focus. Away from the noise, and toward the mechanism. It means paying closer attention to inflation dynamics, labour market conditions, and financial conditions. 

It means watching how central banks frame risks, not just what those risks are. And it means recognising that markets are forward-looking, pricing not what is happening today, but what it implies for tomorrow’s policy settings.

Do these events change the path of interest rates?

Markets may be obsessed with war and energy, but they are ultimately governed by something far more fundamental. Interest rates are the gravitational force of investing. They anchor valuations, shape behaviour, and determine outcomes across asset classes.

Everything else, no matter how dramatic, is secondary. So the next time markets react to a geopolitical headline or an oil price spike, it is worth asking a simple question:

Does this change the path of interest rates?

Because if it doesn’t, it probably doesn’t matter as much as it seems.