I’ve gotten some calls and emails from clients worried about the tensions in the Middle East, particularly with regards to threats Iran has made after the drone strike that killed Qassem Soleimani. These questions typically take the form of “How would my portfolio react if we got into a war with Iran?”, or “Are there changes I should make to protect my portfolio in case things get worse over there?”, so I wanted to take a moment and give my view of the situation, and hopefully give folks some reassurance.
It is important to remember that these events are an escalation of a long running conflict, not the creation of a new enemy. Iran has long perpetuated a hybrid war against the United States and its’ allies, using proxies to carry out bombings and other terrorist activities, while maintaining a near constant onslaught on America’s technological infrastructure. Soleimani was killed while meeting the with militia forces behind the attack on the U.S. Embassy in Baghdad, suggesting Iranian involvement. It should come as no surprise to anyone that Iran did in fact retaliate on Friday, January 8th, by launching a series of guided missiles against Ain al Assad Airbase, a joint U.S.-Iraqi installation. The attack resulted in no casualties, and it appears that the missiles were purposely targeted to avoid any loss of life. All the same, Ayatollah Ali Khamenei took to Iranian television after the attack to call it a “crushing response” to the killing of Soleimani.
While this news all sounds very dire, context is important in these situations. The U.S. does not desire an all-out, armed conflict with Iran, and the Iranian regime certainly doesn’t want one. They will happily call Soleimani a martyr, but I don’t think they are rushing to become martyrs themselves. It appears after the missile strikes against the al Assad airbase, both the U.S and Iran are content to de-escalate away from overt armed conflict. Cyber-attacks are likely to continue, and Iran may accelerate enrichment of uranium for their nuclear weapons program, though it is hard to tell if they had really pumped the brakes in that area in the first place. This would be met with further economic sanctions from U.S., but not armed response.
What does this mean for the stock and bond markets? Very little it appears, and that can be seen in the rather small gyrations you have seen in the days since Soleimani was neutralized. Bonds, gold1, and defense stocks rallied on the announcement of the drone strike, along with oil prices as a reflection of fear of constrained supply from the area if tensions escalated. This quickly reversed, as investors have started to process that a full-scale conflict is unlikely. The S&P 500 index2, a reflection of the broad U.S. stock market, is positive since the day of the initial drone strike as of the market close on 01/08/2020. Surely, if I am wrong, and the situation with Iran and other actors in the Middle East were to get measurably more unstable, the stock market would react negatively, but I don’t believe that there is currently any reason to adjust portfolios away from your long term asset allocation. We will continue to monitor the situation and reach out if changes become necessary.
Please reach out if you have lingering concerns over these issues, or if you think you would still like to discuss changes to your portfolio. Feel free to share this piece with anyone you think might find it insightful.
- Jonathan A. Murdock
There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Asset allocation and diversification do not ensure a profit or protect against a loss.
Opinions expressed are those of Jonathan Murdock and not necessarily those of RJFS or Raymond James. All opinions are as of this date and are subject to change without notice.
1.) Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Bond prices and yields are subject to change based upon market conditions and availability. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
2.) Keep in mind that individuals cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
Source: Jenkins, Brian Michael. “All-out US-Iran War Is Unlikely – But Low-Level War Expected to Continue.” Fox News, FOX News Network, 5 Jan. 2020, https://www.foxnews.com/opinion/brian-jenkins-all-out-us-iran-war-is-unlikely-but-low-level-war-expected-to-continue
Source: Baldor, Lolita C., and Robert Burns. “US Prepares for Possible Iranian Reprisal after Drone Strike.” AP NEWS, Associated Press, 7 Jan. 2020, https://apnews.com/f3d6a76e0dc0e4c1bb6091d628b58e76