Given the major events that have unfolded the past few days in the Middle East, we wanted to provide an update on the situation, what impacts there may be, and how we are approaching it.
What happened?
On Saturday, the U.S. and Israel launched military strikes against Iran (Operation Epic Fury), leading to the death of Supreme Leader Ali Khamenei and other key leaders. The death of Khamenei is significant as he was only the 2nd Supreme Leader since the founding of the Islamic Republic of Iran in 1979 and was the final decision maker for the country. The objectives of the strikes were to degrade Iran’s military capability, eliminate the threat of its nuclear program, and encourage regime change in a country that has been a belligerent actor in the region for some time.
Iran has retaliated with strikes of its own, targeting Israel, U.S. military bases and embassies, and allies such as Saudi Arabia, United Arab Emirates, and Kuwait. The Iranian Revolution Guard has declared the closure of the Strait of Hormuz (used to transport nearly 1/3 of seaborne crude oil), and warned that it will fire on any ships that try to pass. Iran has also begun targeting energy infrastructure in the region, including liquified natural gas (LNG) facilities and refineries.
Risks We Are Monitoring
In terms of equity markets, the biggest impact from this conflict is likely to come from the oil markets. The closure of the Strait of Hormuz is a major development as this makes it more difficult for oil to leave the region, which reduces global supply and pushes prices higher. Both domestic and international oil prices have spiked the past few days.
On a positive note, the U.S. has become less dependent on Middle East oil over the years, and is much less exposed to the closure of the Strait. In fact, China is the most exposed to oil originating in that region.
The most direct impact on U.S. equity markets is the transmission of higher energy costs through consumer budgets (prices at the gas pump) and corporate earnings (higher input costs), as well as the impact on inflation and the Federal Reserve’s policy reaction (expected rate cuts put on hold).
Our Take & How These Events Impact Your Portfolio
Markets do not like uncertainty, so it is no surprise that we are seeing increased volatility in stock prices, and this is likely to continue until there is more clarity on a resolution. We are currently in a phase of this conflict where tensions are escalating, and there are a range of potential outcomes that are difficult to predict.
It’s important to note that historically, while geopolitical events can cause near-term volatility, over the long-term they tend to not impact markets much. The reason for this is that equity markets are ultimately forward-looking and are driven by corporate earnings growth, which tends to trend positively over long periods of time. Geopolitical tensions eventually de-escalate, clarity returns for investors, and markets adjust.
Specifically in the U.S., we continue to see the investing environment as positive, with accelerating economic and corporate earnings growth, a low unemployment rate, and inflation that has been trending down. These are pillars of stability and resilience that can help U.S. equities be a port in the storm of geopolitical uncertainty.
We will continue to monitor the developments in the Middle East closely. We are likely to see a pullback in equities until uncertainties clear, but it is important to remember that this is a normal feature of markets. Our focus remains on the long-term, and we will seek to take advantage of unique buying opportunities that may arise.
IMPORTANT NOTICE
Novare Capital Management, LLC (“Novare Capital”) is an independent SEC registered investment advisor. Advisory services are only offered to clients or prospective clients where Novare Capital and its representatives are properly licensed or exempt from licensure. The information furnished is intended to be general and educational in nature. It does not constitute investment advice and it should not be relied on as such. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your tax and financial advisor. Past performance is not indicative of future results. All investment involves risk and should be carefully considered. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information, and Novare Capital shall have no liability for decisions based on such information. Unless stated otherwise, any estimates, projections (including performance and risk), or predictions given are intended to be forward-looking statements and speak only as of the date of this presentation. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected.
