Not surprisingly, many clients and advisors have asked over the past week how markets are responding to the conflict unfolding in the Middle East, particularly around Iran and the Strait of Hormuz. While geopolitical events often create uncertainty, markets have held up relatively well so far.
As of Friday’s close, the S&P 500 was down just under 5% from its all-time high and roughly 3% since the conflict began. While that reflects some volatility, it suggests investors are not yet pricing in a severe or prolonged disruption. Certain sectors have shown more weakness than others, and international markets have struggled somewhat more, declining by about 8% since the conflict began. That is not entirely surprising given that many foreign economies are more dependent on energy markets.
Despite rising geopolitical tensions, U.S. equities have remained relatively resilient.
One notable development has been the performance of traditional safe haven assets. Historically, investors often move toward U.S. Treasuries or gold during periods of geopolitical stress. Over the past two weeks, however, those assets have not provided much protection. Treasury prices have declined roughly 2%, while gold has fallen by about 5%.
Part of the reason may simply be that investors are still waiting for clarity. We remain in what is often described as the fog of war, where the ultimate scope and duration of the conflict remain uncertain.
Oil prices have risen to around $100 per barrel, but futures markets, which reflect expectations for future prices, suggest that investors anticipate prices declining over time. In other words, markets appear to expect that this disruption may prove temporary rather than long-lasting.
Corporate fundamentals have also remained supportive. In fact, earnings expectations for S&P 500 companies have increased slightly in recent weeks, driven in part by stronger outlooks for energy companies benefiting from higher oil prices.
For now, markets appear to be assuming the conflict will be relatively short lived.
Looking ahead, the path forward remains uncertain. Geopolitical outcomes are inherently difficult to predict, and markets will continue to respond to new developments. Political considerations may also play a role, particularly with midterm elections approaching and gasoline prices already rising about 25% in recent weeks.
Recent reports of infrastructure attacks and mines near the Strait of Hormuz highlight the risk that tensions could escalate further, which remains an important downside scenario to monitor.
From a portfolio perspective, our focus remains on a longer-term investment horizon. While periods like this can create pressure to react quickly, our approach is to base decisions on data and fundamentals rather than short term headlines.
Portfolios entered this period with a relatively neutral stance toward equities and overall risk exposure, which remains appropriate today. If the conflict proves to be short lived, markets currently expect a broader upward trend in equities to resume.
Within equities, portfolios maintain a bias toward larger, high-quality companies with strong balance sheets that tend to weather periods of uncertainty more effectively. We also maintain international exposure for diversification, even though those markets have faced more pressure recently.
Fixed income allocations remain an important component as well. While bonds have not provided significant protection in the past two weeks, they could become an effective hedge if concerns shift from inflation toward slower economic growth.
In times like these, diversification and a focus on quality remain central to our strategy. Maintaining a disciplined approach allows portfolios to navigate uncertainty while remaining positioned for long term opportunities.
As always, if you have questions about how current events may affect your portfolio, please reach out to your financial advisor. We look forward to sharing another update next week.
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
EP Wealth Advisors offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
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Video Summary:
Adam Phillips:
Well, not surprisingly, a number of clients and advisors have reached out over the last week. They want to know about how the market is responding to events in the Middle East, where we think things are going, and how we're positioning portfolios in light of events in the Middle East and specifically in Iran and around the Strait of Hormuz.
So that's what we'll talk about here in the next few minutes. First thing I'll say is that from a market standpoint, markets are actually holding up fairly well. If you look at the S&P 500 through Friday's close, the S&P 500 was down not quite 5% from its all-time high, so about 4.96. If we go Unrounded, since the conflict began down about 3%, so actually holding up relatively well as a whole, although certainly there are pockets of weakness.
Within the market in certain sectors, if we look overseas, international markets have struggled a bit of late, since the war began, down about 8% or so. I think we talked about this last week. That's not too surprising considering that foreign markets are a lot more dependent on energy, and that's really the area that's feeling the most pain over the last couple of weeks.
Now, what I find surprising and what many are asking about is the fact that traditional safe-haven investments, think high-quality government bonds, treasuries, gold, they're actually underperforming here over the last couple of weeks. They haven't really provided much protection at all.
Treasuries are down about 2%. Gold, which is not held in our portfolios, is down about 5%. So there are a few reasons for this, but I think that generally this has been an environment where many are just kind of waiting, waiting for some clarity. , and we're still in this fog of war, unfortunately, but why haven't markets sold off more than we'd otherwise expect?
I think what we've seen over the last few years is that markets have actually shown they've been very, very strong, and they can handle these types of disruptions if they think that they're going to be short-term in nature. If you look at forward oil futures and, and the oil curve that tells you how, what investors are pricing in as far as the future price of oil, we know that oil prices are, are, have been hovering around a hundred dollars a barrel.
And this forward curve actually tells us where investors think the price of oil is going to be in several months down the road. And so what we see is that things are actually trending down. Which tells you that in a month's time, six months' time, a year's time, they expect oil to be lower than it is today.
Said another way. That means that investors expect this to be a relatively short-lived event. Another reason why markets are actually holding up is that fundamentals have been holding up. This is something that we've talked about, that we're not going to get concerned unless we start to see fundamental conditions deteriorate.
And here we see that. Over the last couple of weeks, the outlook for earnings growth among the S&P 500 has actually risen. A lot of this has been from companies within the energy sector that are expected to have better earnings with energy prices moving higher. So not necessarily pricing in that pain just yet.
The risk here is that if this turns into a prolonged conflict. We might start to see these earnings outlooks start to deteriorate. The earnings projections start to move lower. That's something that we will keep an eye on, but I think this helps to at least explain to an extent why markets are holding up better than expected.
Where do we think things are going to go from here? Obviously, we don't have a crystal ball. Unfortunately, we're waiting for more clarity, just like everyone else is. But we are mindful of the fact that President Trump knows it's a midterm election here, he is mindful of the damage that a prolonged conflict can do to the chances of Republicans coming in November, mindful that.
The affordability issues are something that's top of mind for voters already coming into this conflict. And we've seen the gas prices have moved about 25% higher over the last couple of weeks. Now we are also mindful that if President Trump is looking for an off-ramp, he's only one. And we need to see countries like Iran, like Israel, also willing to pull back and look for some sort of resolution, look for an off-ramp.
And so we're waiting here. I will say that over the weekend, as we start to hear more news about attacks on infrastructure and mines in the Strait of. Or moves. This tells us that it really reduces the number of off-ramps that are available and is a downside risk for us to keep an eye on.
From a positioning standpoint, coincidentally, we are we have our investment committee meeting on Wednesday of this week, and so I'm sure it'll be a lively conversation from broad positioning. One of the things that I would, I, I would just remind listeners of is that we are managing based on a 12 to 18 month horizon.
It is very tempting to. Do something in the portfolio. When, when you are, when you are in this type of environment where there's so much noise being thrown at you. I think a lot of us just want to feel better and feel like we're doing something, want to make a change to a portfolio. It is our job to make decisions that are based on data.
Reason, and I think that's really what a lot of people look to us for. And so we don't want to get caught up in the noise. The hard part right now is that the range of outcomes is so wide on both sides, and so it's very hard to make a tactical move, a very short-term move with much conviction. And fortunately, we came in.
This conflicts with a neutral posture in terms of equity and overall risk exposure. So we're not overweight in terms of risk assets or equities. This is a good place for us to be. We're neutral. We have exposure here to stocks, and it's a healthy amount. It's not too much. And so if this is a short-lived event, which we expect it to be at this point, we expect markets to move higher, and we expect to resume this trend that was already in place before the conflict began.
So we're neutral on equities. We are diversified within equities. We've maintained a bias towards larger companies that have stronger balance sheets and are generally better able to weather these periods of short-term disruptions. We have an allocation to international stocks, which, at least over the last couple of weeks, have underperformed.
These are areas of the market that offer diversification. They offer less exposure to sensitive areas like artificial intelligence, which was a trend that was in place before this conflict began, where people were rotating away from that theme. It also allows us to manage the theme that's in place for investors looking.
Outside of the US for opportunities, I don't want to say de-dollarization, I don't want to say divestment from the us but looking to diversify their portfolios. And so this allows us to have some exposure there within fixed income. I mentioned that over the last couple of weeks, it hasn't really provided a lot of downside protection, but this is an important protection to have in place.
If this turns into a prolonged event, it's a nice hedge to have because at some point, the fear will become less about inflationary risks and more about a growth scare and the impact on overall economic growth, which would be a good environment for bonds. I will just say our approach coming into this has been all about diversification and a focus on quality, and it remains.
So right now, I think that's how we want to play this. We will maintain this positioning. Things could change ever so slightly coming out of this week's investment committee meeting. But ultimately, our decisions are going to be based on data. And, we're going to be thinking about, certainly beyond this conflict, what the global landscape looks like.
So I'm going to leave it there for right now. If you have any questions, please feel free to reach out to your financial advisor. I'll look forward to checking up with you next week.