Much has transpired with markets and geopolitics over the past several weeks. For this month’s Insights I want to unpack what’s happened to markets in response to the war with Iran and delve into how markets respond to war generally. I also will spend some time reviewing how wise investors respond to these types of events.
What has happened?
Markets have sold off broadly (although not too deeply in most cases) in response to the war. We have seen declines in bonds, US equities, international equities, and gold. Commodities are one of the few areas that have surged in value since 2/27:
This is an interesting dynamic and is a bit of deviation from what we often see during times of conflict. We often see equities decline, but will typically see safe haven assets like US bonds rally. The likely reason why we’re not seeing a bond rally this time around is due to inflation expectations. Just prior to the war, producer price data came in much higher than expected at 0.48% month over month (nearly 6% annualized). This suggested latent inflation in the system, and high upstream prices that will ultimately flow through to consumers. This led markets to conclude that interest rates will be higher than previously anticipated as high inflation precludes rate cuts. On the back of this data point, the war has pushed energy prices to levels we haven’t seen in several years. Oil has surged from just over $67 per barrel to nearly $100 per barrel as of the time of this writing (March 9). This furthers the higher inflation/higher interest rate theme and markets have responded adversely as a result.
Another interesting observation has been the decline in gold. It has fallen over 2% since the start of the conflict. This contrasts with the Russia/Ukraine war where gold rose 3.69% in the 9 days following that start of that conflict in 2022. The explanation for this is less straightforward than that of the bond decline. A possible explanation is that gold’s safe haven potential has been diminished because of its historic rise over the past several years. The thinking here is that an asset that has risen over 180% in the past three years probably has limited additional upside. Another possible related explanation is that this is a “risk off” market situation (selling anything considered a risk asset). If this thesis is correct, market participants view gold as a riskier asset at these price levels and as such, are less likely to buy gold during turmoil. Regardless of the explanation, the combination of both bonds and gold declining coincident to a large geopolitical shock is somewhat unusual.
Where do we go from here?
When we think about events like these, it is helpful to think about potential outcomes and assign probabilities to said outcomes. As it stands today, here are some potential scenarios to consider:
- Major energy corridors are speedily reopened and although the conflict may continue, energy disruptions end up being of very short duration
- The conflict continues to widen and spikes in energy costs and resultant economic disruption is long in duration and results in slower/declining economic growth and higher inflation (stagflation)
- The conflict broadens beyond the Middle East and results in even greater economic impact
Scenarios one and two seem to be the most likely outcomes although one can’t entirely discount number three. In terms of scenario number one, right now the focus is on the Strait of Hormuz. A tremendous amount of oil and natural gas passes through this narrow entry into the Persian Gulf and commerce through here has slowed to a trickle. The sooner this opens up, the sooner energy markets can normalize. A negotiated end to hostilities, a defeat of the Iran regime, a destruction of Iranian attack capacity, or US naval escorts could open the gulf back up. Each of these possibilities, however, present their own limitations and challenges. An angle of attack that the Iranian regime seems to be pursuing is to inflict enough economic harm to dissuade the United States from continuing the war and how this unfolds over the next few weeks will be telling.
Scenario number two also seems like a plausible outcome as the Iranian regime appears to be very dug in and near-term capitulation seems unlikely. To the extent the Iranian regime is able to continue to resist and have continuity of leadership, this could be a much lengthier conflict. The longer this conflict continues, the more economic damage will be inflicted. Energy prices at high levels for an extended period of time coupled with inflation that is already elevated, could realistically hamper economic growth.
Lastly, while scenario number three seems far less likely, there is enough going on here that it is worth mentioning. When viewed through the lens of history, recent years have started to look like the pre–World War I and World War II periods of great power struggle. There are ongoing battles in the economic, military, technological, and other realms where great powers are jockeying for advantage both in the open and under the surface. This may ultimately result in open conflict like World War II or there may be a prolonged largely non-kinetic conflict like the Cold War. Echoes of the past ring when we hear of Russia giving Iranians locations of potential US targets and hear of the battlefield intelligence the US has given to Ukraine. In the Cold War, the Soviets aided the North Vietnamese with intelligence and weapons while the United States provided similar aid to the Mujahadeen in Afghanistan in the 1980s. While unlikely that this Middle East conflict will spill into other regions and conflicts, it is a risk to be aware of. Obviously broader conflict against near peer adversaries would inflict significant economic damage.
As an investor, how should I respond? Times of conflict unfortunately have always been with us. Many of these end up being only mildly disruptive and even severe conflict doesn’t always preclude market growth. If we look back at prior conflicts, we see that markets tend to bounce back quickly:
A notable exception (and relevant with today’s events) was the Yom Kippur War and associated energy shocks. During that time the United States was heavily dependent on foreign oil and the embargo was crushing for the United States economically. A notable difference with the energy shocks we’re seeing today is that they’re occurring against the backdrop of a much more energy secure United States. Yes, the supply hit is pushing up energy costs, but the impact is far less severe than that of the 1970s. The overall point of emphasis here is that one would miss out on a significant amount of gains if one sold and waited every time a geopolitical conflict arose. When one exits the market, one forgoes the opportunity for growth and just missing a few of the top days (which often occur during periods of market turmoil) can result in significantly impaired growth. As shown below, just missing out on the best five days of market growth would result in 37% less in gains than one would have realized by staying invested over an extended period:
This underscores a fundamental investment truth: time in the market beats timing the market. This statement is not intended to trivialize the war we’re seeing right now, but rather is intended to provide perspective as we watch the events of this conflict unfold. Art Cashin, who was the legendary director of floor operations for UBS used to quip, “The end of the world only comes once and I don’t think this is it”. This sentiment reminds us to zoom out and look at the bigger, long-term picture when periods of turbulence arrive.
While we know that remaining invested throughout market cycles is key to long-term success, there are a few investing “hacks” to consider during times of uncertainty. These include the following:
- If today’s volatility is making you uncertain, consider “letting a little air out of the tires”. In practice this means trimming some of the risk positions in your portfolio on the margins to slightly reduce overall portfolio risk. While one would typically be better to keep the risk positions as is, the simple act of reducing some risk can help us behaviorally avoid the bigger risk of making a wholesale shift
- Look at your diversification. Ideally one enters a period of volatility with a well-diversified portfolio, but if this is not the case for you, consider making adjustments. It’s seldom a bad time to fix a flawed portfolio
- Roth conversions. For those for whom a Roth conversion is appropriate, market declines can represent a good time to convert pre-tax funds to Roth. Investors can move shares in kind into a Roth IRA during a market downturn and if markets rapidly recover, significant tax savings can potentially be realized (because taxes were set at the value of the Roth conversion at the time of the decline). Market declines up to this point have been relatively modest, but should we see steep declines, this becomes a more attractive option
- Unplug. We have more prognosticators today than we ever have and many of these traffic in sensationalism, incomplete facts, and little regard for the outcomes of those acting on their narratives. Disconnecting and focusing on things we can control can be helpful both financially and psychologically. As your financial advisors, we stay abreast of these things so you don’t necessarily have to
As I write this on March 9, 2026, I’m reminded of another March 9 of consequence. On March 9 of 2009 the Dow Jones Industrial closed at just over 6,500 which represented the low point in the global financial crisis. Ferocious selling had eviscerated markets over the prior 6-12 months and it literally felt like the sky was falling. Markets subsequently turned in a big way and in one year, the Dow was over 10,000. In less than 9 years it was over 20,000 and we just recently crested 50,000:
Markets historically continue their march onward and upward. We wish they did so in a more linear and less turbulent fashion at times, but some volatility represents the price of admission to all of us as investors. As always, we stand ready to help as your financial advisors and should you need any counsel or reassurance during this turbulent time, please don’t hesitate to reach out.
