Iran Impacts: How Middle East Tension Affects Markets - Adviser Investments

Iran Impacts: How Middle East Tension Affects Markets

January 10, 2020

Episode Description
FEATURING Jim Lowell and Brian Mackey

The specter of conflict with Iran has dominated headlines recently. Should it also determine your investment strategy? In this episode of The Adviser You Can Talk To Podcast, Chief Investment Officer Jim Lowell and Deputy Director of Research Brian Mackey break down the research on past crises in the Middle East and their effects on:

  • Commodity prices (including gold)
  • The stock market
  • Energy prices—and why a ‘70s-style oil shock is unlikely

They also discuss the potential impact of a cyberattack on U.S. infrastructure.

The Middle East has been plagued by turmoil, but markets have pulled through in the past. To find out what the latest tensions mean for the future of your portfolio, listen today!

Episode Transcript

Jim Lowell:
Hello. This is Jim Lowell, chief investment officer at Adviser Investments. I’m here with Brian Mackey, our deputy director of research, to discuss the recent escalated conflict between the U.S. and Iran, and hopefully over the coming days, what will be a de-escalation of that potential conflict. I know that Brian, our deputy director, has done some research together with the team to provide context on the ongoing conflict with Iran.

Jim Lowell:
Brian, when something like this happens between the U.S. and Iran, what type of analysis do you do for the investment team?

Brian Mackey:
We really try to step back a bit and take a page from Mark Twain, who is famous for saying, “History doesn’t repeat itself, but it often rhymes.” And so what we do is we’ll look back at times in history that are similar to conflicts like today with the conflict with Iran, and look for how the market responded to those events.

Brian Mackey:
And if we can come up with some type of pattern that we see in history, then we might be able to use that to inform our decisions for today.

Jim Lowell:
Well, you invoked Mark Twain, so I’ll give you another quote from Mark Twain, which is, “There are liars, damn liars and statisticians.” Puts those all the way down on the bottom rung. In terms of the patterns that we’re looking for, both in terms of risk and opportunity for that matter… Iran conflict today, but we know there are several other conflicts, and we know of course the region is rife with conflicts in the Middle East, and has been for time immemorial.

Jim Lowell:
Could some type of conflict in the Middle East, cyberattacks for example, maybe an all-out boots on the ground war, total de-escalation, no conflict at all. How do you factor those kinds of considerations into your research, and then your analysis of what you’re looking at?

Brian Mackey:
Yeah, so we really try to take it one by one, where we’ll say, okay, one scenario might be Iran has some type of fight with Saudi Arabia or the United States in the Middle East, that there’s some type of conflict that goes on there.

Brian Mackey:
Fortunately, or rather, unfortunately, there’s a lot of data on conflict in the Middle East for us to look at in history and say, okay, there were periods of an oil embargo, there were wars, there were all these different types of issues that went on, how did the stock market react? How did commodity prices react? And one thing we noticed is that commodities in particular tend to do pretty well during those periods. And that makes sense, that if there’s conflict in the Middle East, you’d see oil supplies get cut off, and so therefore, prices might go up. There’s also potentially fear from there being war in the Middle East, and gold tends to do well when fear is in the market. And so we see gold commodities tending to do pretty well in those periods.

Jim Lowell:
So that kind of fear trade, we have seen time and time again over this last decade. Set aside Iran for today’s event-driven news and look over our shoulders. And in this market, investors have been sorely tested time and again. That fear trade, over the past decade, simply hasn’t panned out. This time around, should we be buying gold or commodities right now?

Brian Mackey:
That’s a great point, and a great question. In the past it hasn’t worked out, and I think the real reason why we tried to avoid commodities at Adviser Investments, generally speaking, is they haven’t had a great long-term return. You mentioned over the last decade, but even over the past 50 years, they’ve tended to perform roughly in line with inflation, going up about 2% or 3% a year. And what we’re trying to do is really beat inflation, so that our savings, or our clients’ savings, are growing faster and we’re able to buy more stuff in the future with it. And so yes, these commodities do well during periods of stress, but they don’t do well in other periods.

Brian Mackey:
And when you look at the stock market, what we’ve seen there is during those same periods of stress, stocks tend to do well. They might sell off in a day, but a month later, a year later, they’re back to normal. And for that reason we say, well why not just stick with something like stocks where they’ve done well during periods of stress, but more importantly they’ve done well over the long term as well.

Jim Lowell:
And probably a corresponding theme, certainly something we practice here at Adviser Investments, and have been doing so for 25 years, is that we take a disciplined and diversified approach to, not just the domestic, but the global markets. And that’s not just in the stock markets.

Jim Lowell:
We also ensure that we are always riding with at least some level of bond buffers for the majority of our clients’ portfolios, as well as even some cash reserves to be able to take advantage of market downdrafts, or just offset what we might feel as the time where greater volatility may intrude into the market.

Brian Mackey:
And that makes a ton of sense.

Jim Lowell:
What about the 1970s? That was a time when the stock market didn’t do well because of the oil embargo and higher oil prices. And they weren’t just nominally higher, nor, for that matter, was inflation. It really was skyrocketing.

Brian Mackey:
Yeah. So the 1970s, I’ll admit that was before my time, but we can look back at the data, and that was, you’re right, that was a period where when the Arab community came out, or the Arab governments came out and said, we’re no longer selling oil to the U.S., and there was this big embargo, that did have an impact on the stock market. And so I think it’s worth taking a look at why that happened.

Brian Mackey:
In the ‘70s, the U.S. was importing about six to eight million barrels of oil every day, so we needed that oil, and when prices went up, that really hurt the economy. And that’s why we saw the stock market sell off in the ‘70s. Fast forward to today, a lot has changed. The economy’s a lot bigger, but more importantly, fracking technology has totally changed the game in the last decade.

Jim Lowell:
Are we allowed to say fracking on a podcast?

Brian Mackey:
I think our marketing team can bleep out words if I mispronounce them. So that’s led to a massive uptick in the amount of production of oil in the United States. And so, I mentioned we’re importing a lot of oil in the ‘70s, at the end of last year, at the end of 2019, we actually started net exporting oil. So higher oil prices hurt us in the ‘70s, but could actually help the U.S. economy this time around.

Jim Lowell:
So we know that the situation between the U.S. and Iran currently is one that’s prone to conflagration, and it would be a very serious engagement. Unlike Afghanistan, Iraq and Syria, Iran has a battle-tested, zealous force. And the worst possible thing for the U.S., both as a nation, but also for a market, would likely be to step into the throws of war.

Jim Lowell:
Hopefully we are able to avoid the boots on the ground. But even if we don’t have to worry about boots on the ground in the Middle East, what about some type of covert, or for that matter overt, cyberattacks, something that the Iranians have already done. Certainly have demonstrated that they are that they’re not just willing, but capable of doing.

Brian Mackey:
Yeah. And I think that’s something that we’ve seen a lot of headlines and Middle East experts come out and say that’s one of the more likely ways that the Iranian government may respond. And so it’s tough to predict what, how that’s going to impact the markets. Because if you think about it, we try to look at times of history to inform ourselves, and there isn’t a ton of history of governments using cyber warfare against other governments or other companies, but there are similar events out there that we can use as proxies.

Brian Mackey:
So if you think about one of the main types of cyberattacks would be an attack on the infrastructure of the United States, so knocking out the data related to pipelines working correctly or the energy infrastructure and the utility and power infrastructure of our country. That’s similar to a natural disaster or a manmade disaster where a hurricane comes in and knocks out a bunch of infrastructure as well. And so what we can do is look at that, and say, well, if a cyberattack has a similar impact as a hurricane, how did the market respond in a hurricane? Maybe it’ll have the same response in a cyberattack.

Brian Mackey:
And what we’ve seen historically is very similar to what happens with periods of tension in the Middle East, where supply is disrupted and so commodities tend to do well. Gold and oil tend to bounce up a bit. However, the stock market also tends to do pretty well in that period. So companies are able to pass on those higher input costs onto the consumer and that leads to profits being okay, and so the stock market tends to do fine. And so again, going back to that point about yes, they both do well in the short term if there’s periods of stress, but stocks do better in the long term, which is why we always kind of try to focus on the stock market.

Brian Mackey:
But Jim, I guess I’d like to… You and I have talked a lot in really the last week, not just this podcast, about Iran and the stock market. What would you take away from all this, all the headlines you’ve seen? How should investors be responding?

Jim Lowell:
Hopefully we’re doing a good job, Brian, in terms of our weekly communications with clients about the fact that neither fear nor hope are investment strategies. Nor is pursuing headline risks, which are always theoretical in nature. Nor pundits, who make their living basically predicting what is as yet, an unknown actual outcome.

Jim Lowell:
So we continue to say that a disciplined approach to the fundamentals, earnings, interest rate, the economic data that we can in fact know, that continue to suggest that we’re on a slow-growth, not no-growth trajectory, especially given that the fed is in the corner of defending that slow-growth, not no-growth trajectory, is the best path to pursue. I would say though, that if you’re feeling uncomfortable, if you’re feeling nervous about what’s going on in terms of not just Iran, but Brexit, the impeachment process, anything that may be monkeying with your defined risk tolerance, or even beginning to have you question your investment objectives and goals, your income needs, your return expectations, give us a call. That’s why we’re here. We are the investment adviser you can talk to.

Brian Mackey:
Couldn’t have said it better myself.

Jim Lowell:
Brian, thanks so much for your insights and analysis. I know that we here Adviser Investments find them reassuring, and we wanted to make sure that our clients were so reassured.

Jim Lowell:
This is Jim Lowell from Adviser Investments, thanking you for listening to the Adviser You Can Talk To Podcast. If you found this conversation interesting, please subscribe and review our show.

Jim Lowell:
You can also check us out at www.adviserinvestments.com/podcast/. Your feedback is always welcome, and if you have any questions or topics you’d like us to explore, please email us info@adviserinvestments.com.

Podcast released on January 10, 2020. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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Investors have been sorely tested, time and again over the past decade—but that ‘fear trade’ simply hasn’t panned out.


Jim Lowell

Chief Investment Officer

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