The War in Iran and Investment Implications

https://www.youtube.com/watch?v=w7OikwR8hek

As widely reported in the news, the U.S. and Israel have launched military strikes against Iran, targeting its leadership, military assets, and nuclear infrastructure. Iran's Supreme Leader is confirmed to have been killed, and Iran has retaliated with missile and drone attacks across the Middle East. President Trump has stated that the goal of the operation, dubbed "Operation Epic Fury," is regime change in Tehran, with strikes expected to continue for weeks and a number of U.S. troop casualties already reported.

The situation continues to develop at a rapid pace, and the safety of civilians in the region and U.S. troops remains the foremost concern. Without diminishing the gravity of these events, it is natural for investors to wonder what the implications may be for markets, oil prices, and their portfolios.

President Dwight D. Eisenhower once said that "plans are worthless, but planning is everything." Applied to the current environment, this suggests that while specific geopolitical events cannot be predicted, the fact that they occur with regularity is well understood. Portfolio construction and financial planning are designed precisely to navigate this kind of uncertainty. Though each situation is unique, financial markets have successfully managed countless wars, crises, and regional conflicts throughout history, including the U.S. operation in Venezuela earlier this year.

For long-term investors, the key is to distinguish between geopolitical headlines and portfolio decisions. What should investors keep in mind as the situation continues to evolve in the weeks ahead?

The current strikes are the latest development in a long-running story

Although the scale of the current military strikes is significant, tensions among the U.S., Israel, and Iran have been building for an extended period. This most recent escalation follows a monthlong U.S. military buildup in the region, failed negotiations over Iran's nuclear program, and President Trump's pledge to support Iranian protesters who challenged the regime earlier this year.

A broader timeline of events helps to provide context for how the situation reached this point:

• Tensions between Iran and the West stretch back decades, including the Iranian regime's longstanding support for Hezbollah and Hamas, which have been at the center of conflicts throughout the Middle East.

• In 2019, Iran launched drone strikes against Saudi Arabia's oil infrastructure, temporarily disrupting global oil production and raising fears of a wider regional war.

• Hamas's October 2023 attack on Israel reignited conflict in the region, eventually drawing in Hezbollah and escalating tensions with Iran.

• Last summer, Israel conducted a 12-day military campaign against Iran, targeting nuclear and ballistic missile programs in what was the most direct confrontation between the two countries in decades.

• Earlier this year, Iranian protesters challenged the regime, with President Trump pledging U.S. support.

• Negotiations over Iran's nuclear program failed to produce an agreement. In recent weeks, a significant U.S. military buildup in the region signaled that a broader operation was being planned, culminating in the current strikes.

The scope of the latest strikes, including the targeting of Iran's senior leadership, is broader than prior engagements. Nevertheless, history also demonstrates that geopolitical conflicts are not always a catalyst for sustained market movements.

Energy markets and the Strait of Hormuz

The most direct channel through which Middle East conflicts affect financial markets is global energy prices. Iran is a member of OPEC and produces around 3 million barrels per day of oil and 27 billion cubic feet per day of natural gas. The country also borders the Strait of Hormuz, the world's most critical energy waterway. According to the U.S. Energy Information Administration, approximately one-third of all seaborne oil exports and one-fifth of natural gas passes through this region. Even the prospect of disruption to this vital corridor could have meaningful implications for global energy markets.

Oil prices had already been rising in anticipation of the strikes. The immediate reaction to the strikes has been a further jump in oil, to the low $70s for WTI and just under $80 for Brent crude. While western countries do not directly import oil from Iran, the global nature of oil markets means that any supply disruption can exert upward pressure on prices.

However, some perspective is warranted. Current oil prices remain well below the 2022 peak of nearly $128 per barrel reached when Russia invaded Ukraine. The current environment is also notably different from prior episodes. In 2018, the U.S. became the world's largest producer of oil and natural gas, with domestic production now exceeding that of other major producers such as Saudi Arabia and Russia. While the U.S. still participates in global energy markets, this level of domestic output provides a meaningful buffer against supply disruptions.

It is also worth noting that oil prices are notoriously difficult to forecast. When Russia invaded Ukraine, many anticipated that elevated prices would persist indefinitely. Instead, prices stabilized and declined far sooner than most projections suggested. Similarly, the U.S. operation in Venezuela this past January prompted a brief move in oil prices but had little lasting effect.

The importance of remaining invested during geopolitical uncertainty

For long-term investors, the most enduring lesson from past geopolitical conflicts is the value of staying invested. It is entirely natural to feel unsettled when headlines describe military strikes, retaliatory attacks, and the potential for a broader regional conflict. These events carry real human consequences and stand apart from the typical flow of market news surrounding earnings, valuations, and economic indicators.

The accompanying chart illustrates clearly that markets have managed even the most serious global events. From World War II to the Gulf War to the wars in Iraq and Afghanistan, markets experienced short-term volatility but were ultimately guided by economic fundamentals over the long run. More recently, the conflicts between Russia and Ukraine and between Israel and Hamas introduced significant uncertainty yet did not derail the broader market trajectory.

It is also worth emphasizing that Iran plays a minimal direct role in investment portfolios. Iran has been subject to heavy sanctions for years, and its economy has been experiencing hyperinflation, with its currency, the Rial, collapsing in value. As a result, very few investors have meaningful direct exposure to the country within their asset allocations.

Markets may experience volatility in the days and weeks ahead as the situation continues to unfold. Oil prices could rise further, and uncertainty may weigh on investor sentiment. However, attempting to time these moves has historically proven counterproductive. Markets have demonstrated a capacity to rebound unexpectedly, and missing even a handful of the best trading days can meaningfully reduce long-term returns.

The bottom line is U.S. and Israeli strikes on Iran represent an important geopolitical development. However, history shows that investors who maintain diversified portfolios aligned with their long-term financial goals are best positioned to navigate periods of uncertainty. And as a final reminder on diversification. Diversification comes in many forms – not just your standard, “stocks and bonds”. The type of asset, like a stock, or bond is certainly one form, and the most common. Other, less commonly discussed forms are which stocks you own and how your ownership differs from index representation. Time frame diversification – how long do you expect to own a security for? And lastly, the method used to pick an investment is another form. Selecting a security for fundamental reasons may provide a more diverse outcome compared to something selected for purely quantitative, or technical reasons.

If you’re interested in discussing what diversification means in your portfolio, please send us a message.

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