Middle East Tensions Go from Boil to Simmer

January 8, 2020

• Tensions with Iran have been rising but may be cooling now.
• The situation is fluid and there are still risks that may impact your portfolio.
• Focusing on what you can control, and diversifying risk factors is prudent.

Financial markets are once again shaking off rising tensions in the Middle East. After months of provocations against the U.S. and American allies by Iran, the U.S. responded with a drone strike killing a high-ranking Iranian general in Iraq last week. Thousands of Iranians took to the street to show support for their fallen general, which in scale was second only to the funeral in 1989 of Ayatollah Khomeini, the founder of the Islamic revolution. Iran vowed retaliation against the U.S., which had market participants around the world watching very closely. President Trump tweeted an attack on U.S. interests would be met with disproportional force, which could involve taking out Iran’s main source of revenue, their oil-producing capabilities.

Iran’s response ended up being missile attacks near U.S. bases, resulting in little damage and no harm to soldiers. The response seemed more symbolic than punitive, which allowed President Trump to de-escalate the situation. Stock futures were trading down more than 1% overnight and oil was up over 4%, but after the reports of damage or lack thereof came in, stock futures turned positive and oil gains receded. The tech-heavy NASDAQ opened the day hitting record levels.

Stock market volatility has been relatively low for a while and nothing can seem to rattle the market. The S&P 500 has not closed with a decline of 1% or more in three months. This begs the question, should investors be more worried about the U.S.-Iran developments? Geopolitical events such as this do tend to be short-lived. Markets tend to recover quickly after events. Perhaps market participants are becoming keener to the short-term nature of events, but there can be longer-term implications. A U.S. attack on Iranian oil refineries, retaliatory attack on U.S. ally oil refineries by Iran, or a possible closure of the strait of Hormuz could push oil prices a lot higher, slowing the global economy and causing inflation to rise. Europe and China import oil from Iran, and they would be directly impacted. America has become more oil-independent, but several major economies are not.

While we feel investors not overreacting to this situation may be prudent, risks are heightened. Investors should be cautious. The U.S. economy is showing signs of resilience in this expansion, which has lasted for ten-and-a-half years. With the domestic economy on solid footing, one should not be overly bearish, but at the same time, global growth is slowing and geopolitical tensions are rising. Assets such as quality bonds should buffer a portfolio against geopolitical risks, while equities can be a good inflation hedge. It is important to remember long-term risk and return objectives and not get distracted by the news of the day. While these developments may be important, they tend to be out of our control. However, we can control the risks in our portfolios. Understanding the different risk factors is important, but so is understanding that if you don’t take enough risk, you run the chance of not growing assets enough to meet your investment goals. Diversification is important and your Cetera financial professional can help you through this process.

This report is created by Cetera Investment Management LLC

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Glossary
The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index includes over 2,500 companies, spanning all 11 sector groups.