As you will have seen from the news cycle over this past weekend, the United States, in conjunction with Israel, launched a largely expected joint attack on Iran. The attacks include Israel targeting Iran’s senior leadership— killing Iran’s supreme leader, Ali Khamenei, and numerous other high-ranking officials—and the U.S. targeting defense systems, naval systems and missile launch sites. Iran has launched counterattacks across the region, including on Israel and multiple U.S. military bases.
President Trump has indicated the military operation is expected to be relatively brief, though it could go on for longer if needed. This remains a very fluid situation that is changing by the hour. As the situation continues to unfold, our aim is to identify what investors may expect and how we are managing portfolios in the current environment.
Although it is very early in the conflict, expectations are for it to be fairly contained and short-lived. Even so, oil prices remain a concern. If there is an extended closing of the Strait of Hormuz (where about 20% of the world’s oil supply passes through on a daily basis), or the conflicts result in a wider war in the Middle East or beyond, oil prices could easily jump to or above $100 per barrel. The related sell-off of risk assets would put pressure on equities. Bottom line, we would expect to see a near-term increase in volatility as a result of the conflict. If the military operations only last a few days, it is more likely that the volatility will subside fairly quickly.
In a world where markets move by the second and headlines shift sentiment by the minute, it can be tempting for investors to react quickly, selling on fear or buying on excitement. Yet decades of market history and real-world investor experience point to one timeless truth: staying the course is one of the most prudent and powerful tools an investor has, as shown in the following chart.
S&P 500 Index & Historic Market Events
Successful investing is rarely about predicting the next big market swing. It is about maintaining discipline through the inevitable market cycles of optimism and pessimism. Consider the power of compounding: the ability for returns to build upon themselves over years and decades, if an investor remains invested. Markets will always experience periods of volatility—geopolitical conflicts, inflation shocks from technological disruptions, etc., but they have historically shown remarkable resilience over the long-term. In fact, it is not uncommon for the S&P 500 Index to be up double digits one-year after a major geopolitical event begins, as shown in the following chart.
S&P 500 Index 1-Yr Forward Returns (%) After Major Geopolitical Events
Staying the course does not mean ignoring risk or never adjusting a portfolio; it means aligning decisions with a long-term strategy. While we generally do not believe geopolitical events warrant a change in strategic asset allocation, there can be legitimate reasons to do so. For example, as someone approaches retirement age or relies more heavily on their savings, it is generally prudent to lower the overall risk of their portfolio. This is why a regular communication cadence with your wealth advisor and financial planner is so important. Please don’t hesitate to reach out to your advisor with any questions.
Author’s Note: Please note that here we discuss only the potential economic and market impact of these events, acknowledging that the physical and emotional toll is likely far greater and that the situation is still developing. Our thoughts are with those whose lives are affected by these events.