Equity markets were down this morning as investors try to assess the potential impacts of the events that took place in Iran and the Middle East over the weekend. Oil prices are rising, gold is rising and bond yields are up slightly. No one knows how long this will last.
An estimated 80% of Iran’s oil/energy products were being sent to China and the rest of the world has been fairly well supplied from non-Iranian sources. However, 20% of the world’s oil supply passes through the Strait of Hormuz, which is a 21-mile-wide strait that connects the Persian Gulf with the Arabian Sea. To the north is Iran. Saudi Arabia, United Arab Emirates, Qatar, Bahrain and Kuwait are among those who also have shoreline along the Persian Gulf. Time will tell if tankers can pass through this region safely. Anything that has the potential to disrupt 20% of the world’s oil supply can have a material impact on the global economy. In addition, the Iranian response also appears to be targeting other refineries in the region, and damage from those attacks could potentially have a longer-term impact. Oil and gasoline prices are likely to rise initially and may become volatile.
Stock markets were flat to down in February. Investors were just beginning to react to a lot of potentially disruptive possibilities from Artificial Intelligence (AI) as recent stories suggested companies that focus on software (such as IBM, Salesforce.com and many others) will be forever changed and even possibly replaced by AI. We are not experts on specific companies, but we believe AI will have far more significant long-term implications for investors than this conflict. This is not to say that geopolitical uncertainties should be ignored, but markets tend to adjust to geopolitical issues rather quickly. As an example, when the US went to war with Iraq on March 20, 2003, the S&P 500 (after initially declining) increased by almost 5% by the time war ended at the beginning of May.
During periods of heightened uncertainty, it can be tempting to act first and ask questions later. While that sounds like a reasonable emotional response, it is often the wrong financial response.
Our client portfolios are diversified by design for times like this. Bonds provide income and relative stability, and values of the stocks of great companies (of all sizes) have historically gone up more often than down if they can grow earnings over time. Alternatives such as gold and other less correlated investment strategies can be additive to risk adjusted performance over time. History has shown that uncertainty often leads to opportunities for those who are well diversified.
Please feel free to reach out to us at any time.