The escalation of tensions in the Middle East and the Israeli army’s campaign in Gaza has flared into open conflict between Israel and Iran. Iranian missiles have been raining down on Israel in retaliation for Israel’s bombing of the Iranian embassy in Syria. Iran has said that its response will be measured. Israel says that the missile attack is a declaration of war, even though it appears that most of the attack was intercepted before reaching the intended targets.
This alarming turn of foreign affairs comes on top of Russia’s ongoing invasion of Ukraine (now in its 26th month) which has threatened to spill into Eastern Europe. It’s natural to ask how these turns of events will impact global stock and bond markets and unfortunately, the answers are not clear.
The quick-twitch traders who drive daily price movements in the stock markets are averse to uncertainty, so the easy prediction is that we could see an initial rush to safety (selling stocks and moving to “safer” investments like bonds or cash) that will take the markets lower. In this most recent situation, global stock markets responded with a downturn, with gold and bonds experiencing price increases. In the past, dips like these have been temporary and if there is a standoff or stand-down, then the quick-twitch traders could be the first to rush back into the stock markets, driving share prices on their previous positive trajectory. This is classic market-timing behavior and one can wonder how they expect to make a profit from these short-term efforts to guess the timing, intensity, and impact of global conflict.
Regardless of their intent, short-term market timing efforts rarely generate the results these investors seek and are even harder to repeat. The good news is that, if the past is any indication, the outcome is somewhat more certain for long-term investors.
The markets, in the past, have risen despite significantly more fearsome events than what we’re experiencing now: the assassination of a president, U.S. involvement in wars in Kuwait and Iraq, the military invasion of Afghanistan and some of the most turbulent political winds in American history.
Hypothetical Illustration.
It’s helpful to remember that even if we feel unsettled about what’s going on in the world, bombs and missiles in the Middle East do not reduce the intrinsic value of U.S. stocks. Global conflict like this can be sad and frightening in the near term, but history suggest it’s probably not cause for concern in your portfolio.
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