{"id":7640,"date":"2020-01-13T16:00:57","date_gmt":"2020-01-13T21:00:57","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=7640"},"modified":"2022-02-27T17:54:50","modified_gmt":"2022-02-27T17:54:50","slug":"increased-geopolitical-tension-means-stocks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/increased-geopolitical-tension-means-stocks\/","title":{"rendered":"What Increased Geopolitical Tension Means for Stocks"},"content":{"rendered":"

Many readers are likely concerned about recent escalations between the United States and Iran. Geopolitical tensions and even war are, unfortunately, inevitable over time. An investor\u2019s job is to constantly assess and re-assess how each conflict may ultimately affect the global economy \u2013 or whether it will disrupt growth at all. In times when politics and geopolitics create \u2018crisis-like\u2019 narratives, I believe it is critical to tune out the noise redouble your focus on fundamentals.<\/p>\n

A good place to start is by examining history in search of parallels and insights \u2013 knowing the past can often provide valuable information for how to view the present. Though the current situation appears to have de-escalated for now, ongoing tensions with Iran may feel dire and worrisome to many. But it\u2019s important to remember that the United States has been through much worse, and the economy and capital markets have a long track record of overcoming adversity.<\/p>\n

Let\u2019s start with stocks. In the table below, I\u2019ve laid out some provocations (and worse) throughout history that I think bear some resemblance to the current situation. I\u2019ve also included stock returns in the year that the event occurred.<\/p>\n\n\n\n\n\n\n\n\n\n\n
Year<\/strong><\/td>\nEvent<\/strong><\/td>\nS&P 500 Return:<\/strong><\/td>\n<\/tr>\n
1950<\/td>\nKorean War<\/td>\n+30.81%<\/td>\n<\/tr>\n
1953<\/td>\nRussia Explodes H-Bomb<\/td>\n-1.21%<\/td>\n<\/tr>\n
1961<\/td>\nBuilding of Berlin Wall<\/td>\n+26.64%<\/td>\n<\/tr>\n
1966<\/td>\nEscalations of Vietnam War<\/td>\n-9.97%<\/td>\n<\/tr>\n
1990<\/td>\nIraq Invades Kuwait<\/td>\n-3.06%<\/td>\n<\/tr>\n
2001<\/td>\nSeptember 11<\/td>\n-11.85%<\/td>\n<\/tr>\n
2003<\/td>\nU.S. Invasion of Iraq<\/td>\n+28.36%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: Annual Returns on Stock, T.Bonds and T.Bills 1928-Current1<\/sup><\/em><\/p>\n

As you can see, there are some very significant, consequential events listed here. Market returns are mixed. In some cases, the declines were relatively modest, and in other cases, the upside was big. I believe the takeaway here is that geopolitical pressures and even war do not automatically imply weak markets. If the geopolitical situation gets bad, the Federal Reserve is tightening monetary policy (raising interest rates) to fight rising inflation, and oil prices are shooting higher, then maybe you get an outcome like 1990. Today, inflation is low, interest rates are low, the Fed is taking a neutral-to-dovish stance while expanding their balance sheet, and GDP growth is expected to notch 2%.<\/p>\n

Geopolitics matter, but economic fundamentals matter more, in my view.<\/p>\n

What about oil markets? When Iraq invaded Kuwait in 1990, oil was a key factor and rising crude prices put pressure on an already weak U.S. economy. But it is important to remember that in 1990, the U.S. was a major oil importer, and we were not a dominant energy producer on the global stage. Today, we are the world\u2019s largest oil producer and our reliance on imports has been in decline for years:<\/p>\n

\"\"<\/p>\n

Source: Energy Information Administration2<\/sup><\/em><\/p>\n

Another key feature of the current energy market in the U.S. is that technological advancement and new efficiencies have allowed our energy consumption to remain relatively flat over the past decade. Fewer imports, more production, and level consumption mean less reliance on foreign oil.<\/p>\n

\"\"<\/p>\n

Source: Energy Information Administration3<\/sup><\/em><\/p>\n

If Iran decides to disrupt oil markets perhaps by blocking shipping lanes in the Strait of Hormuz, for instance, I would argue the effects on the U.S. economy would be negligible. During the period of \u2018sustained high oil prices\u2019 in the chart below, the equity market did just fine and the economy continued to expand. Should oil prices go higher from here as tensions with Iran continue, I do not think we will see a material impact on growth fundamentals.<\/p>\n

\"\"<\/p>\n

Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/p>\n

Bottom Line for Investors<\/strong><\/p>\n

Other potential scenarios to consider are that further escalation \u2013 or war \u2013 could lead to more government spending, which may actually boost overall growth, in my view. Or perhaps increased risk aversion leads to more bond buying, putting downward pressure on yields. Again, outcomes are highly unpredictable.<\/p>\n

In my opinion, the overarching point here is that while there are myriad potential outcomes, investors should consider the possibility \u2013 or even the probability \u2013 that geopolitics, economics, and markets often move in different lanes. While the geopolitical situation worsens, the economy can still grow and markets can still thrive. It\u2019s an investor\u2019s job to continually take the good with the bad, and to weigh the impact of a geopolitical dust-up versus the impact of macroeconomic forces. The latter, in my view, is almost always more important.<\/p>\n","protected":false},"excerpt":{"rendered":"

Many readers are likely concerned about recent escalations between the United States and Iran. Geopolitical tensions and even war are, […]<\/p>\n","protected":false},"author":3,"featured_media":4789,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7640","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7640","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7640"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7640\/revisions"}],"predecessor-version":[{"id":8787,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7640\/revisions\/8787"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7640"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7640"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7640"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}