Last weekend, I turned 61-years-old, and over those same few days, I also learned that I was going to be a grandpa for the first time. (Yay!)
Then, POP!
Those good feelings were interrupted by news that the US and Israel had begun intensive bombardment of targets inside Iran. So much for a calm weekend.
In my sixty-one years, I cannot recall a period without conflict in the Middle East. I know that many have tried to catalyze peace in the region, and many different parties are to blame for the lack of tranquility, but one fact remains:
It's Iran. Again.
As investors, we have seen this drill before: Heightened volatility, uncertainty, and a quest to determine the extent of the damage.
This isn't a huge surprise from a long-term perspective. No one thinks that Iran is a source of stability in the world. (Surely not its neighbors.) Tensions have long been high with the US and had been rising in recent weeks.
On the other side of the ledger, the American people have collectively expressed broad opposition to another war. They recall that America's Middle East interventions are never as short or tidy as our past governments have projected.
THE IMMEDIATE EFFECTS
Market volatility has increased materially since the start of military action, and crude oil prices spiked to $80/bbl, up from the low-$60 range late last year. Analysts warn that oil above $100/bbl will begin to bite economically, and each $10/bbl increase over one year will shave 1/4% from global GDP growth.
Americans may brace for higher gas prices, but the economic fallout is considerably larger for other countries. Japan and South Korea import practically all of their oil. Europe isn't much better off. Other Middle East nations are within the range of Iranian missiles. As such, market volatility in these nations has been even more pronounced that in the US.
ECONOMIC OBSERVATIONS
Recognizing war's devastating human toll, investors must also to take a more analytical view, and examine the specific impact on financial assets, economies, growth, inflation and companies. They also should use history as a guide.
Historically such events have tended to be relatively short lived (measured in months, not years.) That is no guarantee, of course, and any situation like this has a range of possible outcomes. The effects described above, if limited to these, have worse headlines than they have economic impact. On the other hand, a longer-term disruption of energy transit will be expensive, an inflation accelerant, and a drag on global economies.
Fortunately, the US is no longer a net importer of oil. The Oil Embargo of the 1970's just won't play out that way again. The US is more insulated.
In fact, higher gas prices likely have larger psychological impact on consumers (and voters) than they have an actual effect on inflation. Analysts also suggest that the $10/bbl rise in oil prices could add a few tenths to the inflation rate, hardly the disruptive force that we perceive.
Perhaps the biggest issue surrounds not gas prices, but the increasing energy demand from electrification and AI -- which is now colliding with a more constrained supply of oil and natural gas.
Data centers of the world's "hyperscalers" (Amazon, Alphabet, Microsoft, et al) have yet to map how and from where the energy needs of their accelerating growth are to be met. Constrained energy supply from the Middle East has the potential to only add to this mismatch.
MARKET OUTOOK
We conducted a review of recent expert commentary, and some of them read like a book report written by a student who only read the Cliff's Notes. Vague. Equivocating. Hedging.
The fact is that no one knows how disruptive Iran will be in response, especially with its leadership decimated, its naval fleet destroyed, and it nuclear ambitions set back years, if not a decade. A less constrained response is entirely possible when a new regime is backed into a corner, yet at the same time, their options seem increasingly limited.
WE ARE ALL HUMAN
Yes, the equivocation mentioned above will also come from this memo, too.
We see the main takeaways as these right now:
- Markets hate uncertainty, so volatility will rule the day until matters become clearer.
- Longer term impacts on companies seem unlikely, meaning that eventually earnings will matter more than geopolitics.
- Until then, we need to keep our eyes on our long-term goals and focus on what we can control versus what we cannot.
Instinctively, human brains are wired to protect what is ours.
It is normal to have concerns and fears at such times, and we are happy to discuss your concerns with you. But ultimately, these animal instincts do not serve us well as investors.
Fight or flight is stimulated by negative coverage online and in the media. Seldom are those authors or reporters speaking from the position of an investment fiduciary or someone with a verifiable track record of being right.
Their underlying goals of clicks or "ad sales" shouldn't be what drives our activity as investors. So, hunker down, turn it off, and remember how many times you have had these same feelings.
Your portfolio has survived, and ultimately thrived, each time.