Iran Retaliates Against Israel

Middle East War Escalates 

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Last night, Iran initiated an air strike upon Israel in retaliation for Israel’s bombing of the Iranian embassy in Syria earlier this month. This military strike escalates the war in the Middle East and creates a significant risk of further escalation by Iran’s allies, such as Hezbollah. The United States has already vowed to defend Israel. At this point, it appears that Israeli, U.S., and British forces were able to deflect and block most of Iran’s warheads. In addition, and importantly, Iran stated today that the bulk of their retaliation has been exercised. Whether that’s the case will be determined this week. Prayers to all affected by this ongoing conflict. 

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Early Stages of War Requires Patience & Diligence  

We have seen our fair share of volatility in our firm’s thirty years of existence, and we are reminded that these periods require patience and diligence. Reactive market strategies – as opposed to those that are informed and responsive – can be disastrous for your longer-term portfolio performance. We will be following the turmoil in the Middle East carefully and diligently over the next few days as it relates to financial markets.  

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Past Wartime Volatility 

This event may have implications for financial markets. Uncertainty surrounding war almost always causes downside volatility for global markets. Past stock market reactions have been nuanced depending on the severity of the conflict. Past market returns amidst Middle East conflicts have generally been muted, as evidenced by the data below:

However, during the outbreak of World War I in 1914, the S&P 500 index dropped by 18% in just three months. World War II had an even more significant impact, with the index dropping by 30% in the year following the start of the war. The Gulf War, which began in 1990, also had a negative impact on the market, with the index dropping by 15% in the six months following the outbreak of the conflict. It is evident that markets react poorly to the outbreak of global war involving multiple countries for prolonged periods of time. It can be argued that the severity and depth of these historical reactions are influenced by several varied factors, many of which are still unknown pertaining to the present conflict.  

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Short Sharp Market Declines Followed by Recovery 

Considering markets have initially declined by a wide range (0%-30%) in past wartime volatility, in periods of strong economic fundamentals – such as we have today – markets have quickly rebounded. That said we understand that although history is a guide, it may not guarantee that this time will yield the same result.  

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Key Takeaway 

As a general comment, markets relative to earnings and the new AI tech-led business cycle are very reasonably priced. If the volatility due to this conflict is temporary – which historically it has been – it could create an opportunity in certain sectors and shares. Should the situation devolve into something materially worse that negatively impacts the global economy, we stand ready with our Active Risk Management process, which has helped our clients successfully navigate prior challenging economic periods.  

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Global markets have been overdue for a normal pullback (typically 8-12%), and this could accelerate that possibility. For many investors who are not fully invested, this may represent an opportunity that seemed unlikely just a week ago.  

We hope you find this brief update helpful, and we will be following these events closely over the next days and weeks.  

As always, thanks for your continued vote of confidence.  

Your MSR team 

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