How the Middle East Conflict Could Affect Your Portfolio

Presented by Kemple Financial

Early Saturday morning, the U.S. and Israel launched attacks on Iran, targeting senior leadership and military sites. Ayatollah Ali Khamenei, the supreme leader, and other top leaders were confirmed dead. Iran retaliated with missile attacks on Israel and U.S. bases in the region. Although there have been reports of possible negotiations, military activity continues.

This situation is still unfolding, and it’s too soon to know what the longer-term economic or market impact may be. How these events continue to unfold—and the duration of military actions on both sides—could affect oil prices, which had already risen in anticipation of a potential conflict.

The Importance of Oil Prices

The Middle East plays a major role in global oil production and shipping. Because of that, investors are paying close attention to energy markets.

A major shipping channel in the region—the Strait of Hormuz—handles roughly 20 percent of the world’s crude oil. It’s the only path several countries in the region use to move oil to global markets. If the conflict were to disrupt oil production or shipping, oil prices could rise further. If this happens and oil prices stay elevated, a few outcomes are possible:

·         Inflation could move higher.

·         The Federal Reserve (Fed) may be unable to lower interest rates.

·         Stock markets would likely face additional pressure.

This is why oil production facilities and key shipping routes in the region are important to watch in the coming days.

What History Tells Us

Not every geopolitical event has a lasting impact on markets.

Earlier this year, military action in Venezuela had little market effect because it was short-lived and did not significantly affect economic conditions.

In contrast, Russia’s invasion of Ukraine in 2022 had a longer-lasting impact for investors. Reduced supplies of energy and agricultural goods contributed to inflation accelerating in the U.S. In June of that year, overall inflation (CPI) was up 9 percent from the year before. Stock and bond markets struggled for the first nine months of the year before eventually bottoming in October.

Two Possible Paths

At this point, investors are watching two main possibilities:

A prolonged conflict. If the conflict disrupts oil production or shipping, oil prices could stay high. In that case, inflation could move higher and equity markets would likely sell off.

A quick conclusion. If military action concludes relatively quickly, either through achieving objectives or negotiations, the impact on oil prices could be limited. This would likely cause investors to refocus on the fundamental factors that determine the direction of markets over the long term, as they always do.

What Markets Are Doing So Far

Markets had already begun adjusting last week. Stocks declined, and investors moved toward higher-quality assets, pushing the yield on the 10-year Treasury below 4 percent.

After this weekend’s events:

·         Oil prices moved higher.

·         Gold and silver rose.

·         Investors have continued to reduce risk in portfolios as oil prices have increased.

·         The 10-year Treasury yield moved back above 4 percent.

These reactions are not unusual during periods of uncertainty, and so far, market moves have been orderly.

What This Means for Your Portfolio

Even before this weekend’s news, a rotation away from the winners of the past few years to other parts of the market was underway. Concerns about spending on artificial intelligence (AI) infrastructure and the impact of AI on numerous industries had been causing investors to reexamine how they’re positioning their investments.

We believe that diversification across asset classes and regions remains important. A diversified portfolio is designed to participate in changing market leadership while also helping manage risk.

Historically, markets have recovered fairly quickly after geopolitical conflicts. Over time, markets tend to refocus on economic growth and corporate earnings, which drive long-term performance.

If portfolios remain aligned with long-term objectives, periods like this usually do not require sudden changes.

Final Thoughts

There are still more questions than answers about the developments over the weekend. The next few days should shed light on how this situation could unfold and whether it is likely to be a short or prolonged conflict.

We will continue to monitor the situation closely to navigate the path forward, with a focus on managing risk and reward.

Periods like this can be unsettling, but they are a normal part of investing. Staying disciplined and diversified has historically been the most effective way to navigate uncertainty.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

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Kemple Financial is located at 601 N Main St East Longmeadow, Ma 01028 and can be reached at 413-507-3600. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

Authored by Chris Fasciano, chief market strategist at Commonwealth Financial Network^®.

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