By Gene Balas, CFA®
While the current situation in the Middle East presents uncertainties, we emphasize that market reactions to conflict can be significant but may not be long-lasting. Timing the market in such conditions is challenging, given the multitude of variables at play. Investors should maintain perspective by considering the historical resolution of past Middle East conflicts. While recent events may be disconcerting, there is likely no need for major changes to your portfolio in the short-term.
Market Volatility and the Middle East
Political divisions in the Middle East stem from cultural and nationalistic differences going back centuries, if not millennia. Managing that strife in the region has long been a challenge to both regional leaders and world powers alike. However, doing so is imperative: aside from the widespread suffering and human tragedy of the war, the broader region is a vital source of petroleum reserves on which the world economy depends.
From observing the long history of the geopolitics in the region, conflicts in the Middle East can either be contained, or they can explode into wider warfare. In the current situation, Israel is caught between two fronts: the more-immediate situation in Gaza to its southwest, which is controlled by Iran-backed Hamas, and tensions with Iran-backed Hezbollah, to Israel’s north.
Also worth noting is that Iran, in addition to backing both Hamas and Hezbollah, controls the Strait of Hormuz, a chokepoint at the Persian Gulf and the open ocean, through which the equivalent of about 21% of global petroleum liquids pass from the oil fields in the Middle East to the rest of the world, according to the U.S. Energy Information Administration. Given the delicacies of the situation, the U.S. and its allies are treading carefully to pacify tensions before they ignite into a bigger conflagration.
History offers some information about what can happen when things in the Middle East go wrong. When Iraq invaded Kuwait in August 1990, oil prices soared, with Brent crude oil surging from under $110/barrel in July of 1990 to over $230/barrel in September 1990, according to FactSet.
At the same time, the S&P 500 fell in value by roughly 19% during a similar timeframe, according to FactSet. Additionally, the U.S., also contending with a commercial property bubble deflating and the Savings & Loan Crisis, tipped into recession, suffering from high oil prices and low consumer and business confidence.
However, an investor during that period who might have sold their investments in a panic at the thought of war would have been sorely disappointed. In January 1991, when the U.S. entered the war against Iraq with Operation Desert Storm, the markets immediately began to rebound. At the time, the U.S.-led war was widely televised, with bomb strikes on vivid display to the American public. And sentiment improved dramatically in tandem.
As soon as bombs started falling, the markets began rising, with the S&P 500 surging nearly 40% from its lows in late 1990 until the end of 1991, according to FactSet, more than making up for its losses during the initial market correction. And oil prices returned to their prior (lower) trading range by early 1991.
That is not to say that this will happen now, of course, but it does illustrate how important events in the Middle East are to the global economy. What is different this time, though, is that the U.S. is now a net oil exporter, and is thus less reliant on oil from the Middle East now than it was previously. However, the Middle East is still an important oil supplier to a large portion of the rest of the world.
Returning now to the present conflict in the Middle East, the lesson learned from prior geopolitical conflicts is that yes, there can be significant, serious market reactions to war, but they may not be long-lasting, depending on the nature and duration of the conflict. Timing the market can be nearly impossible, given how many variables must be considered and the great degree of unknown factors surrounding all of them.
Currently, the potential trajectory of the current conflict between Israel and Hamas and Hezbollah is unknown, whether the U.S. and its allies will become involved, or whether Iran may assume a more direct role in the conflict, rather than simply a backer of Hamas and Hezbollah. We do know that the U.S. is now sending warships to the Middle East with troops to be prepared to assist in any battles should they escalate. The presence of U.S. forces in the region hopefully may deter more aggressive actions by Israel’s enemies.
And of course, it is possible that the U.S. does become more involved in the conflict, particularly if Hezbollah increases its attacks on Israel, given Hezbollah is better armed than is Hamas and Israel’s focus is on the opposite end of Israel, in the Gaza Strip where it is fighting Hamas.
Considering the above, there are many uncertainties involved and a range of potential scenarios that can unfold. Given these unknowns, market volatility can certainly be expected as investors continuously price, and then reprice risks of the possible outcomes of the situation. It is natural for prices of stocks, bonds, and commodities to swing widely from day to day (or even hour to hour) in environments such as this.
We believe investors would be well served to keep the unrest in the Middle East in context. Remembering the history of prior Middle East conflicts (and their eventual resolution), perhaps the best thing for investors to do is nothing at all. While the events unfolding in the Middle East are no doubt disturbing and the human toll is unimaginable, there’s no reason to believe they should warrant any major changes to your portfolio. In the meantime, however, if you have specific questions or concerns regarding the current geopolitical landscape and its potential impact on your current investment strategy, please don’t hesitate to talk with your SEIA advisor.
The information contained herein is for informational purposes only and should not be considered investment advice or a recommendation to buy, hold, or sell any types of securities. Financial markets are volatile and all types of investment vehicles, including “low-risk” strategies, involve investment risk, including the potential loss of principal. Past performance does not guarantee future results. For details on the professional designations displayed herein, including descriptions, minimum requirements, and ongoing education requirements, please visit seia.com/disclosures. Signature Estate & Investment Advisors, LLC (SEIA) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Securities offered through Signature Estate Securities, Inc. member FINRA/SIPC. Investment advisory services offered through SEIA, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323.