The Middle East conflict between Israel and Iran took a significant turn on Saturday as the U.S. entered the fray with airstrikes on nuclear facilities in Iran. While we will have to see what U.S. involvement will ultimately mean for the conflict (will it mean escalation or diminishment?), situations such as these have often led to short term volatility in the investment markets. FactSet took a look back at 40 major historical geopolitical events since 1940, including Germany’s invasion of France, the Cuban Missile Crisis, Iraq’s invasion of Kuwait, 9/11, Russia’s invasion of Ukraine. Here is what the data of the 40 events shows:

1. Initial reaction of the stock market (the S&P 500) was slightly negative with market losses, on average, of 1.3% the month after the initial event.
2. Three months after the initial event, stock performance was, on average, even.
3. 12 months after the initial event, stocks had average gains of 2.1%.
4. Worst one month performance of any of the 40 events was negative 19.9%, when Germany invaded France in 1940.
5. Best one month performance was positive 6.8%, after the Kennedy assassination.
6. We would expect oil prices to spike as the middle east region is the hotbed for crude oil production (oil prices are up 4% in Sunday futures trading).
7. We have been overweight the energy sector in our equity portfolios for the last 6 months, this overweight likely will help portfolio performance.
8. Gold is also likely to get a boost in price as gold is a traditional hedge against global conflict (gold up $10/ounce in Sunday evening trading).
9. Positions in gold (which we increased in April) should help performance.
10. Fixed income positions traditionally have held up well in conflicts and provide ballast against volatility.

Conclusions:

The middle east conflict adds to the global uncertainty brought on by tariffs. The U.S. stock market has been resilient in the face of the tariff volatility (a big April drop, then a big May rally). Historically, stocks have had downside volatility initially during geopolitical conflict but positive performance after 12 months. Our positioning in energy and gold can benefit if there is further volatility. We are hoping for a de-escalation in this conflict but if there is an escalation, we will be ready to make appropriate portfolio modifications, as necessary.

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