Over the weekend, the U.S. launched strikes against Iran’s nuclear facilities. Currently, I only have the details reported by major mainstream outlets. However, given that stock market futures are trading sharply lower on Sunday, I wanted to get something in print before the market opens relating to navigating this event over the next few days. Here is what we know so far.
On Saturday, the U.S. launched a military operation that struck key Iranian nuclear enrichment sites such as Fordow, Esfahan, and Natanz through a coordinated and targeted effort during the weekend. According to WSJ, A U.S. official said the Trump administration had reached out to Iran to “make clear” the attack was a one-off assault, not the start of a regime-change war. On Saturday night, the President held a press briefing, declaring that the B-2 stealth bombers and precision bunker-busting ordnance hit targets as U.S. military sources verified the operation. Satellite imagery and preliminary reports indicate the attacks did critically harm Iran’s uranium enrichment capabilities, but the full extent of the damage is currently unknown.
Of course, for Americans and the financial markets, the response from not only Iran but also Iran’s allies will be critical. Immediately following the attack, Iran has lashed out against Israel with broad daylight ballistic-missile barrages that caused significant destruction in Tel Aviv. Israeli authorities report that at least 86 people have been wounded, and suspect that an impact in Haifa may have been caused by a malfunctioning Israeli interceptor rocket. Israel countered that attack and said it launched attacks on military targets in western Iran, claiming to destroy two Iranian fighter jets and eight missile launchers.
Concerning the U.S., Iran has only fired strong words:
“The world must not forget that it was the United States — during an ongoing diplomatic process — that betrayed diplomacy by supporting the aggressive actions of the genocidal and lawless Israeli regime. Now, by completing the chain of violations and crimes committed by the Zionist regime, the US has itself launched a dangerous war against Iran. The Islamic Republic of Iran reserves its right to resist with full force against US military aggression and the crimes committed by this rogue regime, and to defend Iran’s security and national interests.” – Iran Foreign Ministry
The latest turn in the conflict exacerbates the already widespread anxieties in the Middle East. Iran has said it would strike at American troops around the region in the event the U.S. got involved in the conflict, and the oil- and gas-rich Gulf states that host U.S. bases are concerned the violence could spread to their territories. Such is why the market showed immediate and expected reactions to the unfolding events. The price of oil skyrocketed through overnight trading, Treasury yields dropped sharply as the dollar rallied, and equity index futures showed a sharp decrease.
For investors, we must implement a process of logical evaluation and portfolio risk management when markets experience turmoil.
The Nature of Geopolitical Shocks
Geopolitical occurrences of this type typically follow a well-established pattern in the market. When the first reaction occurs, it generally leads to risk aversion. As noted, given the uncertainty of future events, global investors seek a “safe haven” for investment dollars. As such, U.S. Treasury Bonds and the U.S. dollar appreciate given their perceived “financial safety.” Last week, global investors were already starting to make that shift with the dollar rising.
We also see that the same flight to safety immediately follows previous military actions.
- Safe-Haven Currency Behavior: During the 1990 Gulf War, DXY surged over 12% in the first month, as investors sought refuge in the dollar.
- Short-Term Rally, Long-Term Normalization: In 2003, the dollar rose about 5% after the Iraq War began, then gradually trended back toward baseline over the following 6–12 months.
- Mixed Response During Ukraine War: The dollar jumped ~3% weeks after Russia’s invasion.
So far, the dollar has already started rallying following the initial attacks from Israel on Iran, and this weekend’s actions could spur that rotation further.
As noted in “The Dollar’s Death Is Greatly Exaggerated,” there is support for a strong dollar rally.
“Furthermore, everyone from the “shoe-shine boy to the street corner vendor” is shorting the dollar. According to BofA’s fund manager survey, the short position against the US Dollar is at the highest level in 20 years. As such, any reversal in the dollar could be substantial if those “shorts” are forced to reverse their positions.”
Conversely, while the dollar and bonds tend to perform well during a military conflict, stocks often sell off early, as money rotates to safe havens, but recover as the “conflict” becomes a known quantity. The recent Iran-Israel Conflict post does a much deeper dive into the stock market’s response to geopolitical events; however, the following table provides the context.
“While geopolitical events like the latest Iran-Israel conflict happen, investors focus on the worst possible outcomes. However, it is critical to step back and look at how markets have responded throughout history to such events. Carson Research published the following table on Friday, showing previous historical events and market outcomes.”
“Yes, there were a few periods that led to more disastrous outcomes, such as the Yom Kippur War, the oil embargo, the USS Cole bombing, 9/11, and the London Subway bombing. However, those events coincided with the bursting of the “Nifty-50” bubble, the “Dot.com” bubble, and the “Financial Crisis.” While there is undoubtedly a risk that the current Iran-Israel conflict could spiral into something larger, history suggests those odds are relatively low and that over the next 12 months, any near-term impact will likely produce investment opportunities.”
The crucial takeaway for investors is that uncertainty creates short-term market volatility. However, a fundamental distinction exists between events that produce short-term market fluctuations and those that modify economic expansion patterns or corporate earnings. Most geopolitical events in most historical situations fall into the first category. The market responds with immediate price movements, but the effects disappear quickly unless the event damages consumer demand, capital expenditures, or earnings potential.
The current situation between the US and Iran likely falls into the first category. That isn’t just speculation. It’s data. The market’s behavior during military conflicts since World War II, including the Cuban Missile Crisis, the first Gulf War, and the Russian invasion of Ukraine, demonstrates a recurring pattern of sharp equity market declines followed by quick recoveries, sometimes within weeks. The market responds to news events by overreacting until investors gain clarity, leading to a market correction.
This is why investors must react logically rather than emotionally to these events.
Market Expectations for Monday and Beyond
The start of Monday will bring investors to face various conflicting market elements. Oil price increases because of Iranian potential retaliation and supply chain problems in the Strait of Hormuz will create benefits for energy companies but harm transportation and consumer discretionary sectors. Energy conflicts throughout the Middle East trigger sharp increases in crude prices in a historical context. The June oil price increase exceeded 8% during the brief period when Israel and Iran experienced rising tensions.
Risk-averse investor behavior will force Treasury yields to decrease because investors will select the most secure and liquid market available. The 10-year note faces potential support level breaches as investors rush toward quality assets while economic growth slows down. The current market environment creates favorable conditions for bonds, as any surge in energy prices will negatively impact economic growth. With global central banks already cutting rates, any negative shock to the U.S. economy will support the Federal Reserve cutting rates later this year.
However, following this weekend’s news, the most critical question for investors is: “What is the appropriate investment response?”
Investing Tactically—Not Emotionally
Viewers of CNBC will observe the screen displaying red colors this morning. Futures will likely be decently lower, volatility will jump, and headlines about the U.S. bombing of Iran will dominate the day’s discussion. It will be logical that many investors will feel compelled to act by selling their assets, rotating their portfolios, and panicking.
Unfortunately, this is when most investment errors occur.
The understanding of investor psychology turns from helpful to essential during these moments. Emotionally, investors will focus on “loss avoidance” if markets decline sharply over the next few days. As an investor, the most crucial action to take during an “unexpected, exogenous event” is to DO NOTHING.
That’s right, don’t do anything.
Investors make a mistake by focusing only on the event. The thinking is that because missiles flew this past weekend, more will occur tomorrow. This affects how people see things and produces unreasonable choices. Loss aversion and hardwired fear of losses over gains result in capitulatory selling, often at the worst possible time. The elevated uncertainty surrounding the U.S. and Iran requires an avoidance of emotion. As noted above, such events are usually short-lived, creating opportunity. The opportunity becomes accessible to investors with discipline and a clear framework.
From a tactical perspective, consider the following positioning:
- Overweight U.S. Treasuries: With the 10-year yield trending lower, bonds provide ballast to portfolios and benefit from safe-haven flows. If the geopolitical situation escalates, duration could outperform equity handsomely.
- Hold Cash: Our portfolios have been overweight cash recently following the market surge after “Liberation Day.” Any market pullback due to the latest events will work off the short-term overbought conditions, allowing us to deploy that cash at improved risk/reward levels.
- Selectively Own Energy: Focus on upstream producers with strong balance sheets. Rising crude prices can create a short-term earnings tailwind, but beware of crowded trades. The time to buy energy was before the missile strikes, not after.
- Watch Defense Contractors: Raytheon, Lockheed Martin, and Northrop Grumman often benefit from renewed military spending. These stocks may outperform if the market sees this as the beginning of a new defense cycle.
At the same time, it’s wise to avoid or underweight the following:
- Airlines and Travel: Higher jet fuel prices and geopolitical fear reduce profitability and demand. The entire sector could come under pressure if the situation drags on.
- Emerging Markets: Capital flows will likely shift toward safety, meaning EM currencies and equity indexes may underperform. Dollar strength could exacerbate these moves.
- High-Beta Tech: In a risk-off tape, speculative growth names are the first to get hit and the last to recover. Don’t be the one holding the bag when liquidity dries up.
Above all, resist the urge to “bet” on any singular outcome. No one knows how Iran will respond, whether this will de-escalate in days or expand over months.
What we do know is that volatility often leads to mispricing, and mispricing creates opportunities for those with patience.
Final Thoughts: This Too Shall Pass
Investing during geopolitical volatility is never easy, but it is a consistent test of discipline. People who succeed in the market do not panic during bomb attacks; they prepare their strategies before the smoke settles.
The strikes against Iran remain uncertain regarding their status as the start of a broader conflict or the peak of escalating tensions. The market will eventually move from initial fear to a sharper focus. As is always the case, investors will quickly assess the impact on stocks’ most critical driving factor: earnings. Does a one-time strike on Iran negatively impact the U.S. consumer enough to create a marked decline in earnings? That answer is probably no.
More importantly, while specific sectors, like travel, could negatively impact earnings, many companies will benefit. This is why active investing generally performs better than passive investing over time.
Investors’ genuine concern should be their irreversible mistakes from Monday through Wednesday this week, rather than the potential market drop this morning. History shows that fear will dissipate quickly, and markets will stabilize as investors return to fundamental factors.
Focus on the present moment. History shows that maintaining rational thinking, while resisting the temptation to sell, often leads to better outcomes.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube Customer Relationship Summary (Form CRS)
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