As Middle East Conflict Escalates, Here's the Best Way to Protect Your Portfolio
After Iran's missile attack on Israel, here's my take on the conflict from a military perspective and from a market and investing point of view, including one asset class that remains susceptible.
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With Iran bombing Israel on Tuesday, the conflict in the Middle East has escalated once again. As we watch how this plays out, we have been getting a flood of notes, thoughts and comments. This is my take from the gist of the comments and thoughts:
- Iran’s proxies have been hit hard (Hamas and Hezbollah), are on the run (Hezbollah) and other proxies are certainly concerned if not scared about what Israel may have in store for them.
- Those proxies are likely watching Iran’s response and are not likely to be impressed. The “deal” we presume you make as a proxy is that you get weapons and support to fight for your cause, but you have the “comfort” that there is something far bigger and stronger than you, who “has your back.” There have to be a lot of doubts running through every proxy right now, between what has been done to Hezbollah in less than two weeks, and another largely failed retaliatory attack by Iran. The initial failed attack could have been done “on purpose” (though I don’t think it was intended to fail as epically as it did), but a second failed attack, “on purpose” doesn’t seem plausible.
October 7th was an “existential” moment for Israel. The intelligence system, held in incredibly high regard for their effectiveness, failed. The walls failed. Israel was under direct attack in a way not considered realistic. That went right to the psyche of the nation and is a main reason why first, Israel believed they needed to eradicate Hamas as a fighting force, and then chose to move their attacks against Hezbollah (who had been shooting at them and disrupting shipping in the reason, since shortly after the initial attack by Hamas).
If you see it this way, which is how I see it from a military perspective, not from a humanitarian perspective, political relation perspective, etc., you seem to have your enemies on the run. Their “protector” failed to “protect.” Israel Prime Minister Netanyahu said some things recently that could be construed as hinting at regime change in Iran. Why would you stop now?
There will likely be more escalation from Israel as they have the opportunity to set back their enemies even further.
Your Portfolio
I think oil (even after Tuesday’s gains) remains the best way to protect your portfolio against more attacks (WTI is around $70 which has been low end of our range). Even if we get escalation to de-escalate (which I think is still the path), there is a chance that oil production or transport infrastructure could be damaged in the next round of attacks, which would leave oil prices higher even after any sort of de-escalation.
Equities remain susceptible, especially at current valuations and the “risk” that the economy isn’t so weak that the market has to price in fewer rate cuts (seems odd to call that a “risk” but that is the world we live in).
Treasuries just won’t work that well. Maybe some flight to safety, but that tends to be short lived as two things seem to stop the rally:
- Further escalation is likely to cause oil prices to rise, not helping bonds.
- The amount of money countries will need to spend on weapons and defense is going to continue to ratchet higher, creating bigger deficits and more supply of bonds.
What we don’t know, is what Russia or North Korea will do next.
China, having gone down the stimulus path, has enough on their hands getting their economy to turn the corner, to do much to stir the pot at this moment.
