The War in Iran: Oil Is Up. Stocks Are Down. How Are Investors Doing?

Stay-at-Home Parents Driving Capitalism

Evan Barnard: I am Evan Barnard, filling in solo for Paul, who is banging some drums somewhere in this country, making a lot of people happy. And I’m joined by RJ. He’s going to keep me out of trouble today as much as humanly possible.

RJ: I’ll do what I can.

EB: And this is one of those challenging days. Gee, there’s just nothing that’s been going on in the world. In the financial markets, the oil markets, politically, there’s just nothing to talk about, right? No, there’s plenty going on.

I do want to start with a couple of things. Certainly, for you regular listeners, you might have heard a faux pas last week where I inadvertently said my wife hadn’t worked since we had gotten married, and Paul quickly got me out of the fire.

But for all of you ladies who are defending the home front, understand that you probably drive more of the engine of capitalism than a lot of people that may be actually out in the workforce, and frankly, this would apply to a stay-at-home husband as well. We’re starting to see that a little bit more.

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But the economic benefit in a family is a team sport, and so understand, you have a huge value.

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It just may not show up in dollars and cents in a checkbook, but it probably keeps your kids healthier, your family healthier, everybody happier, and so that’s a good deal. So I wanted to personally clean that up, frankly, not just for my lovely wife, but for all of you that might have heard that the wrong way.

I usually say “hasn’t worked outside the home.” She probably works harder than me, so enjoy that. You stay-at-home moms or stay-at-home husbands, you are highly valued.

Stocks Suffer Third Straight Weekly Loss

“Stocks Suffer Third Straight Weekly Loss as Investors Brace for Longer Conflict.” “Oil prices settle above $100 a barrel, capping a wild week.”

Now, a lot of you have probably lived through some bigger swings in the market than we’ve had the last two or three weeks, certainly during COVID, where things were down 38% or so in about four weeks, maybe six weeks to hit the bottom of that. That’s certainly a gut check, but if you lived through dot-com, if you lived through the mortgage crisis, anything in the last 20, 25 years.

Right now, S&P was down about 3% from January 1, so we don’t even call it a correction. Not that we are technical investors around here, but you don’t typically call it a correction until it’s down 10%. Now, it might be down from the high, but we’re still only down 3% from just January 1.

So I want to put some of this in context today of, gee, the third straight weekly loss, that’s not going back too far. It’s not like the 52nd weekly loss, and there’s no sign of things coming back, kind of like 2008.

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It just looked like it was going to keep going down until it didn’t, until it changed course.

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So going back to the article, “Stocks slipped for a third straight week, with investors weighing the risk of a prolonged Middle East conflict on energy prices and economic stability. All three major indexes logged a weekly decline of more than 1.2%. … The tech heavy NASDAQ slipped 0.9%. Stocks initially rose …” blah, blah, blah.

All right, and so you start to get now, we’ve had the data. Now let’s interpret the data and say, “Well, here’s why this happened, and here’s what we think is going to happen next.”

“Both economic reports predate the conflict with Iran when they were talking about revising fourth quarter GDP, suggesting that growth was already slowing before the recent spike in oil prices added further strain. … The prospect of a longer term standoff has replaced initial hopes of a swift resolution, leaving markets to grapple with an increasingly clouded outlook. The Strait of Hormuz effectively remains closed to traffic,” et cetera, et cetera.

The Importance of Volatility

But as you go further down in this article, this really to me speaks to what actually creates the market itself. Here we go.

“Still, some investors remain cautiously optimistic. While stocks have pulled back and credit spreads have widened, the movement has been relatively contained. Meanwhile, the U.S. economy is significantly less energy intensive than in previous decades, providing a buffer against higher oil prices in the near term.”

“There’s no panic in the equity markets. There’s no panic in the credit markets. Generally, that’s a pretty good sign of just a modest price resetting,” said Josh Chastant, portfolio manager of I think GuideStone Funds.

“We’re still optimistic for the remainder of the year, with the big caveat,” this is the attorney’s got ahold of the article, “that it’s predicated on a more near term resolution to the conflict in Iran.”

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So we’re going to have volatility until the end of time. Volatility is actually what creates the return in the stock market. 

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As Paul has said many times over the years, if there’s no volatility, if there’s no risk, there’s really no return. Cash doesn’t fluctuate all that much in your savings account and your checking account, irrespective of any deposits or anything that you’re making, but it’s a relatively flat curve on the growth line, and it’s a very shallow line.

You’re not really earning much relative to inflation, generally speaking. Equity markets, by contrast, have much more volatility, and they have a much higher return over time, but certainly, you have to put up with the third straight weekly loss just like you have to put up with the COVID decline and so forth, so this is nothing new.

Now, here’s the exciting thing for me. I can speak for at least four of the offices, just because I maintain really close contact. I’m going to bet the other coaches would share the same thing.

I literally have received no phone calls over the last two weeks from clients that were worried or scared or said, “Is this the time to do something or do we need to be making a change?” I have not received a single call. Now, we’ve called people, we communicate through the show a lot and all of that, but because of the educating we do, because of how a portfolio is structured, our clients understand that this is just part of the game.

If we’re going to be investing in any kind of stocks whatsoever, even if it’s through mutual funds or ETFs, that I’m going to have to deal with that volatility, and I have a benchmark that I can look at for the various categories in my portfolio and see, “Oh, my fund in that category was down 4% and the benchmark is down about 4%. Okay, it’s doing its job, and likely, I’m going to see some rebalancing at the end of the quarter.”

And so you really, if you have a game plan, if you understand the pieces of your portfolio, and we’re actually going to get into that later on. Don’t know if it will be this hour or the second hour, so don’t get mad at me if it’s not right after the first set of ads, but we are going to get into some of the nitty-gritty of building a portfolio so that you do not have to worry about these kinds of events.

The Fog of War

I also want to touch on, last week, we started talking about the fog of war, because the Iran conflict had just started for the most part. We’d had our first week of hostilities, and I think we’d had our first four casualties, I believe, by last Saturday. But here’s another article also from the journal.

“Traders,” not traitors but traders, “Tell Us How They’re Dealing with the Fog of War.” They face “some of the wildest commodity trading on record,” whipsawing oil prices and market swings. So our clients are relaxed.

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They’re not calling saying, “Oh gosh, what’s going to go on? I can’t make a decision because of the fog of war,” and it’s because they don’t have to. 

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And then here, we have the professionals talking about, “Well, how are we going to deal with the fog of war?” And, “The U.S. and Israeli war sent oil lower,” and so forth.

And then here we have, I may mispronounce the name, I apologize, “Shaia Hosseinzadeh bet that a war in the Middle East would upend global markets. This was the week his wager paid off.” He had “already been snapping up shares” of liquefied natural gas, rare-earth firms, and so forth, and last month, he was “discussing opportunities and risks ahead with investors” and so forth.

But all of a sudden, he’s got a good trade; however, he didn’t really know that it was going to be a good trade. It was only good because war started. He could have really lost his shirt. That volatility of the market has spilled into the stock market from the oil market, already showing signs of strain with all three major indexes in the red this year.

“Investors who previously struggled to parse headlines about the latest advances in artificial intelligence — and even speculative blog posts about AI’s impact — are now boning up on the supply chain for fertilizer and combing through satellite imagery of tanker traffic in the Strait of Hormuz.”

The Investor’s Dilemma

We’ll get into this in more detail, as I said, later on, but we have this, what we call the investor’s dilemma.

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Part of the investor’s dilemma I’ll touch on right now, in the context of these current events, is that we approach investing with a basic fear of the future. 

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I don’t want to make a mistake. I want to make sure either I’m going to beat the market or I’m going to get out before it goes down, or I’m going to get into something great before it goes up, and so that leads to trying to predict the future.

If I’m afraid of the future, I’m going to do everything possible to find out, okay, what’s going to go on? Am I going to be okay? What’s the good decision, and so forth.

And so a lot of the financial press, and at this point, a lot of just mainstream or cable news organizations are in the business of constantly providing data points and opinions so that you can come up with some prediction of the future and make a choice on how you want to invest something. Ask yourself if this is how you want to live your life.

This is a quote from the article: “That rush into stocks swept up John Bevis, a 33-year-old day trader, who has been spending longer hours at his desk in the living room of his home in Clemson, South Carolina. His morning routine lately: Check the markets on his phone from bed and head straight to the computer around 7:30 a.m. Only after he scans news and stock futures does he step away to make his first cup of coffee. Bevis stays glued for hours at a time to one 49-inch monitor flickering with stock charts and another screen with a constant stream of headlines.”

“Personally, I love volatility,” he said. Now, can you imagine that is your lifestyle, how relaxed you’re going to feel as opposed to just constantly on edge?

Make or Break Strategy

But here’s the funny part of this. Obviously, there’s no audit of his actual investment returns and things like that, but here’s what the article summarizes.

“His trading strategy — which has included buying the dip in energy stocks when oil prices drop, and trading one exchange-traded fund that triples the return of the Nasdaq composite — has paid off. On Wednesday, he treated himself to an oat-milk macchiato from the coffee shop down the street. ‘It’s been a good year.’” Now, I have to wonder how much trading and what kind of profit of his big win was if he’s going to go get an oat milk macchiato down the street from the coffee shop.

RJ: Must have invested in GameStop.

EB: There you go, at 62 or something like that. Here was an interesting quote, though, from Webull, which is an online brokerage company. Anthony Denier, he said, “A headline could literally make or break you.”

And I’ve been doing this a long time, Paul’s been doing this a long time. Actually, all of us have.

I can’t list one time that a client or even a prospective client has ever come in saying, “I want you to come up with a make or break strategy,” like, “I want to win big or lose it all.” That’s just not how humans are really designed to work, certainly in a group.

There are groups of risk-takers out there, but the data shows that they don’t tend to actually financially benefit from making all of these predictions, even if they’re right, because they’re not the only people watching the news. There’s another eight billion people listening to the news, living their lives, making purchase decisions, and ultimately, that’s going to drive the market, and/or markets, as we say, because you really need to be invested in more than one market to truly be diversified. So, just because it’s been a choppy three weeks, nothing really to worry about.

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It may continue to go down the next couple, three weeks. Who knows? It just means we have more of a rebalancing opportunity when the time comes.

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When we come back, I am going to revisit some other oil crises that we’ve had. Last week, we talked about what the market does during war. Did a little bit of research, and so when we come back, I’m going to talk about how the market has performed in previous oil shortages.

The Market During Oil Shortages

So, going back to the oil crisis and oil, I think it’s closed above $100 a barrel. I’m not sure. It may still be in the low to mid-90s. I frankly didn’t check this morning, but it’s pushing $100 a barrel. It spiked earlier in the week and settled back down.

But I wanted to see, well, okay, what’s the market done in previous disruptions to the oil production? And so we had, frankly, the Iranian nationalization called the Abadan Crisis back in 1951 to 1954, or roughly ’51 to ’53.

Settlement came in about 1954. The State Department material noted that closing Iran’s oil industry would remove a major supply. Now, these are kind of funny as I go through this.

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As you hear these numbers change, you get an idea of how the economy has grown as well in some of this stuff. 

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But it reduced production by 550,000 barrels per day. I don’t even think that gets the U.S. through like nine hours or something today. But if you look at that time period, the S&P rose from 21. Go figure.

This is now like a 6,600-point index. But in 1951, it was 21.63. And by the end of that disruption, it was 30.73.

So it was up about 30% over that three-year period. And so we handled that quite well from the market standpoint. Roughly the same growth on the Dow Jones. And granted, those are just large U.S. markets.

And like we say all the time, you want to be way more diversified than that, but that’s where we get some really good data. The Suez Crisis, 1956 and ’57, there we had about a 10% drop in the market over an eight-month period. And the market closed at the end of that war at 44.

The S&P 500 was at 44, but still well up from the 30 at the end of the Iranian Crisis. The Arab oil embargo OPEC production cuts in ’73, ’74, that was kind of a bloodbath in stocks. When we do a lot of calculating of volatility and portfolios, we always want to include 1973 and ’74 because those had some significant negative volatility.

But if you look at the timeframe of the oil embargo, which was about five months or so, the S&P started at 110 and closed at 97. So it was down about 10% or so, just like the Suez Crisis. The Iranian Revolution lasted about a year, but the S&P went from 100 to 107.

The Market Continues To Recover

As we keep going, we had the Iran-Iraq War. So these are mostly disruptions due to war, but some was just political. Iraq invades Kuwait.

That was roughly seven months. The S&P went from 330 to 362, about a 10% increase.

The Venezuelan strike caused about two to three months of a disruption in supply, and the market did drop again about 8% or so. We don’t think about this much, but Hurricanes Katrina and Rita actually had a significant disruption in the oil supply over a two- to three-month period.

But again, the S&P went from 1,224 to 1,237. It went up a teeny bit, but basically flat.

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What we find is whether it’s political, whether it’s war, whether it’s weather, the market continues to recover. 

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And as I said, the Libyan Civil War, not that any of us have been talking about that over the dinner table recently, back in 2011 for about eight months, the S&P started at 1,321 and closed at 1,207. Again, down about 10% over that period.

But again, what is it today? It’s about 6,400, which is a significant gain from any of these.

And even at the start of the Russia-Ukraine War, the S&P was at 4,400. And through 2022, 10 months or so later, excuse me, not that that conflict is over, but in terms of the disruption to the oil markets, it was 3,726. So again, it was down about maybe 15%, and we’re already back to 6,400.

And so we’re going to have these kinds of disruptions. Right now, obviously, the conversation is around oil particularly and its effect on energy prices. What’s the effect going to be on the economy?

Well, it’s a global thing. It’s not just a U.S. thing. It’s not a Republican/Democrat issue because oil supply affects France and Europe, Germany, U.K., and so forth, but it’s going to be something.

It could be a hurricane, could be tornadoes, could be war, could be COVID, and the market will take that in stride. If you’re disciplined, you just don’t have to worry about it. One of the reasons I did this data is that one of the articles I was looking at was one of these all-caps exclamation point, exclamation point of “this is the worst disruption in the oil industry ever and the world is going to end,” that kind of thing, just a sensational headline.

And the bottom line is, well, no, it’s happened almost a dozen times that I just listed just in the last 65, 75 years. So we’ll probably have another oil disruption sometime before I leave this planet, and hopefully that’s a while, but you just don’t have to sweat it if you have a very diversified portfolio and you don’t panic.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.