Geopolitical headlines can be upsetting to investors since they are unlike the typical flow of business and market news. These events are difficult to analyze, and their outcomes are challenging to predict since they depend on the actions of individuals and groups with complex histories and motivations.
With the potential for an all-out war between Israel and Iran, many are wondering if now’s the time to put cash to work in the stock market or should you instead hedge your bets with cash, crypto, Rolexes, fine art, rare cars, antiques, wine and bourbon caskets? The short answer is the former. Disciplined, long-term investors should stay on course while sticking to diversified portfolios regardless of the presidential election cycle results or impending geopolitical risks. In most instances the economic business cycle dictates the path of the stock market more so than the political party in control or world events happening at that point in time.
Israel Iran Conflict
On October 1st, 2024, Iran launched 200 ballistic missiles at Israeli targets. Now Israel is vowing a forceful direct retaliation. This marks a continuation of a long-standing conflict between the two nations. Iranian-backed groups
Include Hamas (Gaza), Hezbollah (Lebanon), Palestinian Islamic Jihad (Gaza/West Bank), Popular Front for the Liberation of Palestine-General Command (PFLP-GC), Houthi rebels (Yemen) and Shiite militias in Iraq and Syria.
The roots of the conflict can be traced back decades. However, a significant turning point was the October 7th, 2023, attack by Hamas, where over 1,200 civilians, including more than 40 Americans, were killed, and more than 250 people, including 12 Americans, were taken hostage. This attack marked one of the worst in Israel’s history and deepened the rift between Israel and Iranian-backed groups.
The situation remains volatile, with international fears of escalation. Any direct conflict between Israel and Iran would most likely be like igniting a tinder box with global ramifications, otherwise constraints on oil and supply disruptions, including further destabilizing the Middle East and drawing in major powers like the U.S. and its NATO allies.
Regarding U.S. financial relations with Iran, over the past 17 years, several U.S. administrations have engaged in financial dealings with Iran that has benefited them greatly. The Obama administration released $1.7 billion in funds to Iran in 2016. This release was closely tied to the 2015 Iran nuclear deal, which also saw the lifting of economic sanctions and unfreezing of Iranian assets, reportedly valued at up to $150 billion. In addition, more recent deals under Biden’s administration policies in addition to billions paid for prisoner releases have facilitated billions more in Iranian oil production per year to resume. Just in 2023, it’s estimated that Iran’s oil companies earned about $53 billion in net oil export revenues. (US EIA).
How War Impacts Markets
The outbreak or anticipation of war can lead to a sharp sell-off in stocks. At the same time, investors may move towards traditionally safer assets like gold, treasury bonds, alternative investments, insurance based products and buffered equity index strategies, seen as safe havens. We are taking steps now to prepare our clients in case of an Israel Iran war escalation. Despite the initial negative reaction to war, stock markets have remarkably shown resilience over time. They often quickly recover as the situation stabilizes or as the scope of the conflict becomes apparent.
Without minimizing the real-world impact of war, investors may wonder how they might impact financial markets and the economy, otherwise their portfolios. History shows that while geopolitical events can lead to market uncertainty and volatility, their impact on portfolios tends to be short-lived. Markets typically calm as situations evolve and eventually stabilize, leaving broader business cycle trends as the main drivers of performance. Thus, investors should resist making decisions based on headlines and instead focus on their long-term financial goals.
*The accompanying chart highlights market returns following major geopolitical events this century. Surprisingly, the average drawdown of 21 major geopolitical events including major wars going back to the Pearl Harbor attack of 1941, was nearly 5% – with an average market recovery of only 47 days, with the markets up greatly a year later in most instances.
Some events, such as 9/11, changed the world order and had long-lasting effects, even though it was primarily the dotcom bust that led to poor market performance at that point in time and not war or the incumbent U.S President.
This was also true in the 20th century which experienced strong bull markets despite major global events such as World War II, the Vietnam War, wars in the Middle East, and the Cold War which loomed over much of the second half of the century. This perspective underscores the fact that making investment decisions solely based on geopolitics or politics (like this years Presidential elections) is not supported by history.
While today’s conflicts with Israel will be closely watched, investors ought to avoid passing judgment with their portfolios. In the long run, markets tend to recover and perform well primarily because business cycles are what matter over years and decades, despite the events that take place over weeks and months.
Business of War
The 2016 movie “War Dogs” sheds light on the less-discussed aspect of war: the immense business opportunities it presents, especially for private contractors and suppliers. War is indeed a multi-billion-dollar industry, with companies involved in defense contracting, logistics, security, and reconstruction benefiting financially from conflict. This influx of money can stimulate certain sectors of the economy, create jobs, and boost production levels, particularly in industries related to defense and security. In the aftermath of the 2003 Iraq war, there was a surge in contracts awarded to private companies for various services ranging from construction to security operations.
At the height of the occupation of Iraq, the US had 170,000 men and women in uniform stationed in 505 bases sprinkled throughout all the provinces of Iraq. When you consider just uniforms, weaponry, quarters, food, care and even air conditioning to support such expansive remote military operations, it is immense in ongoing costs in the billions.
However, while war can stimulate economic activity and drive growth in specific sectors, it can also contribute to inflationary pressures in the U.S. Increased government spending on defense and reconstruction projects can lead to higher demand for resources, materials, and labor, potentially driving up prices across the economy.
Additionally, disruptions to global supply chains, particularly in regions directly affected by conflict, can further exacerbate inflationary pressures by limiting the availability of certain goods and commodities including oil. In last week’s newsletter “Crude Realities: Oil Prices, and War” we outlined that crude oil could spike well above 100 per barrel from a direct Israel strike, otherwise other measures Iran could take to limit supply greatly affecting the price at the pump and U.S. inflation that we may not have seen since the 1970’s.
Oil prices can affect the global economy
When short-term disruptions to global markets occur, they tend to be the result of rising oil prices or supply chain disruptions. Issues with oil supply can lead to higher energy prices, potentially impacting inflation and economic growth globally.
The current situation in the Middle East has led to a slight increase in oil prices, with Brent crude rising from $69 per barrel in early September up to $75 and then back down to $70 by mid-October. This increase is relatively modest compared to previous spikes seen during other geopolitical crises. In 2022, oil prices rose to nearly $128 per barrel even with no disruption of crude, propelling the average gasoline price in the U.S. to over $5 per gallon, before falling once more.
An important difference between today’s environment and that of the past decades is that the U.S. is now the largest producer of both oil and gas in the world. Domestic oil production now exceeds 13.3 million barrels per day, more than Saudi Arabia, Russia, and other members of OPEC+. In theory, greater energy independence is one reason the U.S. may be more insulated from global events than in the past, although it still depends on imported oil for 40% of consumption for various reasons.
It’s also possible that the macroeconomic environment was far more sensitive to oil prices earlier this year when investors and the Fed were trying to determine the path of inflation. In that environment, month-to-month changes in oil prices could impact inflation figures, which in turn could affect the path of monetary policy. However, now that inflation has decelerated significantly and the Fed has begun to cut rates, markets may be less sensitive to short-term fluctuations in oil prices.
When it comes to geopolitics, it’s also important to remember that while markets depend on global stability, the rule of law, and business/consumer confidence, they are primarily driven by broader market and business cycle trends and not headlines. So, although regional conflicts can increase the “risk premium” on financial assets due to increased uncertainty, it’s often a mistake to make dramatic shifts in portfolios in response to geopolitical crises.
The bottom line? While the Israel Iran conflict is serious and deserves attention, investors should maintain perspective when it comes to their portfolios and long term investing goals. It’s important to work with a trusted advisor to construct a portfolio built around long-term financial plans that can handle periods of uncertainty.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.