The Retired Investor: Regional conflicts present buying opportunities

Death and destruction are not something that anyone wishes for, but all too often, conflict has occurred frequently over the past years. Historical evidence suggests that in regional disputes markets typically recover within a few days or weeks.

 

Does that mean the financial market participants are uncaring or callous? Not at all. In most cases, markets rebounded because the underlying economic cycle, either in the U.S. or worldwide, was expanding. This growth not only supported markets but also helped move them higher despite geopolitical uncertainty. Conversely, during periods when the market struggled to find its footing, it was mainly due to broader market conditions.

 

Morgan Stanley Wealth Management recently conducted a study on key geopolitical events dating back to 1940, starting with Germany's invasion of France and ending with Russia's invasion of Ukraine in 2022. They examined the stock market's performance three, six, and twelve months after each event and compared it to periods without notable geopolitical events.

 

They found that, on average, the markets underperformed over three months, but over six- and twelve-month periods, the returns were identical. It was as if the conflict or crisis had never happened. There were some geopolitical events that had a significant and lasting impact on equity markets, but market conditions also played a part.

 

The 9/11 bombing of the World Trade Center, for example, occurred about the same time as the dot-com boom and bust unfolded, causing the NASDAQ to fall substantially and take the rest of the market with it. In 2022, during Russia's invasion of Ukraine, the Federal Reserve Bank raised interest rates roughly at the same time, sending stocks lower.

 

If we look back through the 20th century, strong bull markets occurred despite World War II, the Vietnam War, and conflicts in the Middle East. Most of the exceptions to this rule centered on energy. The 1973 oil shock disrupted markets for over a year, resulting in a period of stagflation in the United States. The sudden spike in oil prices, occurring at a time when oil was in short supply, disrupted the economy and led to significant inefficiencies. And yet, Russia's invasion of Ukraine, which temporarily caused oil prices to gyrate, came down again rapidly as additional oil supply came onto the market quickly.

 

A critical difference today is that the U.S. is largely energy independent. It is the world's largest producer of oil and gas. U.S. oil production now exceeds 13.3 million barrels per day. That is more than Saudi Arabia, Russia, or any other member of OPEC.

 

That is not to say that geopolitical risks have no impact. On a country-by-country basis, the story may differ significantly. While the U.S. market has barely skipped a beat throughout the Russia/Ukraine war, the European Community had a different experience. After breaking its dependence on Russian energy, the EU economy suffered from a lack of supply and sky-high energy prices.

 

That difference explains the reason why the continuing turmoil and conflicts in the Middle East have not caused more than brief and shallow declines in the stock markets. The present war between Israel and Iran has seen oil prices spike from the mid-sixties to the mid-seventies dollars per barrel and are presently fluctuating by 1-2% per day based on the most recent developments.

 

Fears that Iran, in retaliation for Israel's continued attacks, decides to block the flow of 20% of the world's oil through the Straits of Hormuz has investors on edge. However, there has been little follow-through in the equity markets thus far. This situation could change if the U.S. decides to take a more proactive role in the conflict.

 

No one knows how long this present daily exchange of bombardments will last. Israel has stated that it will take at least two weeks, if not more, to accomplish their objective. They intend to remove the threat of an Iranian development of nuclear weapons. If  U.S. forces become involved, I would expect a deeper market decline. However, if history is any guide, markets will regain their upward momentum in reasonably short order.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at [email protected].