How Geopolitical Conflicts Impact Investment Decisions

As geopolitical tensions rise, especially with the recent Israeli-Palestine war, investors are bracing for potential financial repercussions. Volatility indicators and oil prices have spiked over the weakened. It remains to be seen if the Israeli-Palestine war will be contained within the region or expand to border countries or Iran with US involvement. With the advent of declining interest rates to counter the effects of inflation and a strong global economy, this new reality could justify a reversal in policy, bringing treasury bonds back to strength; for the first time since 2020. (Treasury futures are up ½% since the writing of this article.)

It’s been a rough couple of years for investors. With rising rates comes a decline in ‘safe’ Treasuries and corporate bonds, which almost all investors who practice diversification have felt. Even with the gradual rise in tech stocks, albeit boosted by the advent of AI, portfolio total returns remained flat for the year due to the continued decline in treasuries. Some investors have dropped treasuries from their portfolios for the purpose of avoiding a future loss, however, this could serve them badly in a new war scenario, where bonds have traditionally resulted in a flight to safety during times of crisis. Those without bonds may miss the bond rebound.

Investors will be faced with a fork in the road. With stock volatility likely to rise, maneuvering a portfolio now might be too risky in the fog of war. Measures to contain the crisis might be put into place or a quick victory for Israel might serve to stabilize markets. There’s also the Ukraine war which may pick up pace now that the US is a bit distracted. There’s reason to wait and see what unfolds. Most investors held the ‘safe’ assets as described, treasury bonds, and if diversified, also held assets in energy, which will be the first to show strength during a conflict.

Oil is the most traded commodity in the world and is the first to react to a geopolitical conflict as short-term supply gets restricted and therefore price driven higher. Historically, oil spikes have occurred in times of Israeli conflict, including the Yom Kippur War on Oct. 6, 1972. Then, oil prices skyrocketed from $28.83 to $62.85 (inflation-adjusted) although it may not have been the only contributing factor. In the 1972 invasion of Lebanon, prices jumped from $66 to $148, and by 1980 prices have declined since. Smaller spikes emerged in smaller, subsequent conflicts which might suggest a different outcome in oil prices depending on the war’s outcome.

As stocks are expected to see volatility remember your time horizon for when you need the money back, tax situation, and risk tolerance. Take advantage of cash rates; the Betterment Cash Reserve account pays 4.75% currently and is FDIC insured up to $1m if held jointly.

In these uncertain times, expert guidance is crucial. At Eureka Wealth Management, we not only keep you updated but also help you navigate the complex world of investments, retirement planning, and more. Call for a free initial consultation at (760) 537-0791 or book online at eurekawealthmanagement.com.

Sources

FT 10/9/2023 “Dec­ades of war, upris­ings and dis­putes”

Historical Oil chart (link)