On Tuesday, January 7th, Iran launched a series of missile attacks against US military bases Al-Asad and Arbil with state sponsored television reporting that this is the “opening of Terahn’s revenge” for the US drone attack responsible for killing General Qassem Soleimani. Later, Iranian foreign minister Javad Zarif signaled this could be both the “beginning” and the “end” of the strikes against the US. These two conflicting statements leave us wondering what to expect. Our hearts and prayers are with our troops and their families.
We know this escalation in tensions between the US and Iran may have many of you asking yourselves, “How will this affect my portfolio, and what should I do about it.” We want to provide a little historical perspective, and so have reviewed the stock market’s performance following some of the more recent military engagements the US has been involved in.
It is interesting to note that there is no “clear” relationship between military engagement and the stock market’s performance. We believe there is a logical explanation for this; the US maintains a standing army and a sufficient budget to carry out military objectives. Should the situation with Iran deteriorate, we do not expect much change in the US economy. Past and current data suggest there are sufficient resources to address the challenges in the Mid-East without pulling workers from their jobs and drafting them into the military. The data also suggests that we will not need to divert resources from manufacturing for the private sector to the military, meaning the vast majority of our economy will carry on as it now is.
If we were expecting a war like WWI or WWII, where there was a need of able bodies and willing hands to join our military forces and for factories and materials to be redirected to create the necessary resources for our military objectives, then we’d have to look at things quite differently. We cannot envision the situation in Iran will rise to that level.
As such, our recommendation is to be patient and follow the data. We understand the temptation to reduce equity exposure on this sad news, however, we also know that fourth quarter 2019 data is due to start arriving over the next couple of weeks. With the record setting sales during the holidays, we expect it will be a good earnings report, and will likely continue to the lift the market up. Our concern over getting out of the market and then trying to pick a point to re-enter is that the strategy of timing the market may leave us worse off than if we did not. If we were to see a substantial drop in earnings, or over-borrowing, or other negative long-term economic data, then we would recommend scaling back portfolio risk. But it does not appear that we need to worry about receiving this type of data yet.
The risk that we are facing presently is what we call “Headline Risk.” Some investors may choose to react to the headlines rather than the data, and their portfolio’s returns may pay the price for that decision.
Please call us or email us with any questions.