S2EP4 – The Impact of the U.S. – Iran Conflict on Investments: What Investors Need to Knoe
This episode dives into how geopolitical conflicts, particularly the US vs Iran situation, impact financial markets and investor portfolios. Our team sheds light on historical resilience, strategic diversification, and opportunities amidst uncertainty — providing actionable insights for long-term investors.
Key Topics:
- How geopolitical events like the Iran conflict influence oil prices and inflation
- The historical resilience of markets during political crises
- The importance of diversified portfolios in volatile times
- Economic collateral damage and sector-specific impacts
- Strategies to remain calm and avoid knee-jerk reactions
- Opportunities arising from market fluctuations during conflicts
- The role of innovation and technological change during wartime
- How to interpret short-term versus long-term market reactions
Full transcript of the episode
Victor Gaxiola: Okay, so welcome back to the Resilient Investors podcast. Today we have a very special podcast because we thought it was extremely important for us to address the ongoing conflict, US versus Iran, the things that are happening in the Middle East, and more importantly, the implications to client portfolios and the decisions that we're making when it comes to how we structure their portfolio. So right off the bat, I just want to get maybe some initial thoughts. Kim, I'll start with you and Carolyn. You know, when things like this happen and obviously they dominate the news cycle, obviously it's very natural for people to have some concerns. And I think we're here to basically say, hey look, we've seen things like this before, try to avoid any knee-jerk reactions. But from your perspective and experience, what would be some of the first things that we've been telling clients and things that you would want them to know or those that are listening to the podcast?
Kim Gaxiola: I think even before I start off and say anything, I have to preface this with that I am a Gen X and I have resilience in me. And I feel like we've been here before.
Carolyn Rowland: Mm-hmm.
Kim Gaxiola: And so I want to start off with saying, first of all, I am so saddened by anything that's happening, know, people being killed and innocent by the standards of this tragic situation. First and foremost, that's where my heart is. But from a standpoint of, my gosh, if you look at the things that we've been through in the past, the reason why I say resilient is because I remember 911 and I remember what happened here in our own backyard and we get through it. And so I think I attacked this from the point of resiliency and saying the initial shock is always gut punching, gut punching, but give it time because over time
Carolyn Rowland: Mm-hmm.
Kim Gaxiola: we realize that our markets are resilient, our economy is resilient, and in the end, it has to do with all the economic outputs in our economy rather than...
Carolyn Rowland: That was immediately my thought too. It's so hard to not feel emotion, right? Like, of course. But when you take a look at it from our perspective and how it impacts how we do business, how we manage our clients' portfolios, the markets hate volatility, hate uncertainty, excuse me, hate uncertainty. And so I think that's what we're seeing. And so one of the biggest questions I am getting right now is, should we be concerned? Well, emotionally,
Kim Gaxiola: Okay.
Carolyn Rowland: Feel free to be concerned, right? Like, of course this is so heavy, but from a performance and portfolio standpoint, concern doesn't necessarily mean take action, right? So that's kind of where my head's at and what I've been telling people, yeah.
Kim Gaxiola: Carolyn, I love that. Emotionally, yes, be concerned.
Carolyn Rowland: Feel it.
Victor Gaxiola: Well, you know, going back to what Kim's kind of started, her comments on the personal side, I'm old enough, I'm also a Gen X, but I'm old enough to remember the hostage crisis in the late 70s. You know, when Carter was the president and Iran held some people from our embassy hostage, and you know, once Reagan was brought into office, they were released. So there has been a lot of animosity, obviously, between the two countries for many, many years, for decades.
Carolyn Rowland: have been.
Victor Gaxiola: And I also know people, families that are close friends that actually escaped Iran during that regime change that took place who feel right now a sense of liberation, a sense of hope. From the standpoint that there is an opportunity for Iran possibly to return to its former self prior to this which happened 40, 50 years ago. And so you see both sides obviously a lot of concern, but it goes back what we were saying. When it comes to this particular conflict, we've often said in podcasts in the past, I think one of the roles that we play as advisors is being able to take data, information, in this case, a geopolitical event that's taking place, curate that information to try to understand what is this impact, like how does it affect the bottom line for those of our clients that are looking to retire or for those that are growing their nest egg or for those that are already retired, will this impact their income when it comes from their portfolio? And just as Kim had pointed out, there is a historical precedence when it looks at
Kim Gaxiola: right.
Victor Gaxiola: you know, conflict or isolated conflict in certain parts of the world and the specific impact that it has on portfolios. And truthfully, what tends to happen is that there are corollary or, you effects. You know, there's a residual effects, consider it economic collateral damage, right? So obviously when you look at this, start thinking about the direct impact and given the region of the world that is taking place, the first thing that impact was oil. Middle East being a huge oil producing and natural gas producing area will directly impact. So you saw the price of crude oil go up. And so if you follow the math, there's a series of events that happens. If oil goes up, then gasoline prices go up. And so here in California, upwards of $5 a gallon. So if you're a commuter or a small business or a business that depends on transportation, commuting, that already starts impacting your bottom line because your cost just went up. We're seeing this in the airline industry. We're seeing this in the transportation industry. Any logistics companies, they're directly impacted because now gas prices have gone up. The other corollary event that could happen is if gas prices and things like that go up, then the cost of goods could potentially go up, which means it's inflationary. So a conflict like this specific to oil leads to, you follow the math, you get to an inflationary effect. Well, if we're in a period of inflation, then the Fed that's trying to curve for inflation and unemployment starts thinking maybe we shouldn't cut interest rates. So then you can start seeing that one activity, in this case a conflict in Iran, depending on how long it lasts, could have these corollary and trickle-down impacts on the economy.
Kim Gaxiola: You're absolutely right. That reflects consumer sentiment, which is a strong part of our economy. And if consumer sentiment is worried and fearful, they may not spend as much. Their wallets are tighter and they're feeling this. So you cannot underestimate consumer sentiment. We are a consumer based economy. On the flip side of that. There is a lot of things that happen during war time, which can speed up the economy as well. We are producing more, perhaps. We are in need of more materials and ammunition, all of that. There's a lot of innovation that goes on. I think it's really fascinating. The innovation that is...discovered maybe it's already been there, but we are discovering it as it's being used because this war does not look anything like World War Two. It doesn't even look like the, you know, 1980s or, you know, our first time in Iraq because of technological change. And so I think that there is also this eye opening revelation when people see some of the innovation during these times of conflict. And, you know, that I think is really interesting.
Victor Gaxiola: Well, the other thing that I think is interesting, and it speaks to the reasons why it's important to have a diversified portfolio, because as we pointed out, yes, it's like this balancing act that takes place where certain things might be impacted because oil prices are going up, the cost of energy goes up, and all that. There are other areas that are actually going to do well in this kind of environment. You look at aerospace. You look at defense. You look at certain industries will benefit. You speak to say nothing of the innovation that could be created. The bottom line when you look at it. The fact is that Iran was one of the countries that had economic sanctions. So it was very isolated when you look at that Iran under these sanctions was really isolated from foreign investment. So I'll put our clients' minds at ease. We do not have any sort of direct investment in Iran, and very limited when it comes to the Middle East. mean, most of it is domestic or large multinationals that have operations all over the globe. And so that should provide some relief. The direct impact that something like that, and I found it here, was Iran went to close the Strait of Hormuz. I hope I said that right? Which severely, it's a waterway that restricts, you know, the trade and the movement of oil and natural grass. They actually think that that waterway, statistically, is responsible for roughly 20 percent of the total global oil and natural gas shipments. And so you can see that if you are impacting one-fifth of the movement of oil and natural gas, that that would have that trickle-down effect on the ability to manage supply chains. It should increase the cost. Of course, a lot of countries that were dependent on receiving some of this oil or natural gas from Iran now has, you know, it will impact their economy, it is hard to put in dollar signs exactly what that impact will be because we don't know how long this could last. And it goes back to what Carolyn had said, markets hate uncertainty. So a lot of the volatility we've been experiencing and will likely continue to experience is because we're waiting for the dust to settle. We're waiting for it to figure it out. And I don't know what that solution looks like. Could it be possibly internally within Iran that the people kind of rise up and then they take command and control of their country again, in which case, Western nations could potentially help them as they start moving to a more democratic setting. That could take years, it could take decades. It's hard to know. But I did want to put at least people's minds at ease that our exposure specific to Iran is nothing. It's more the industries that are impacted by those decisions than anything else.
Carolyn Rowland: Mm-hmm. I'm glad you brought that up because I've been thinking a lot about our international exposure as a whole and just on the developed side and even emerging, right? So everybody's kind of impact, I think when it comes to their portfolio is going to be a little different based on how they have that allocation internationally. I know I personally, I'm a little underweight on internationals or have been just because I'm so worse. I think we feel this way as a team too, that we have a really strong conviction for the US economy. And that makes up the bulk of our portfolios and there's a time and a place, right? So maybe speaking to where our current international exposure is and how we'll see that impact clients' portfolios.
Kim Gaxiola: I, you know, we always talk about international exposure as this asset class international meaning outside of the U S. and I really don't like to use that with our investments that are international because in my opinion, what we invest in our great companies, they just happen to be outside of the U S. but you know, unlike most advisors who decide we should have 15 % or whatever the number is that they deem appropriate for international investing. That's not why I would invest in international. I just want to invest in that all-star team and I don't want to limit myself to an all-star team only in the US. And so when I look at it, our investments that we have just happen to be overseas.
Victor Gaxiola: Well, and the thing is that from looking at this particular conflict, like any conflict, it's always going to be highly unstable. But the truth is, and this is when it goes back to our belief in the financial markets, truthfully, there was an anticipation. Of course, then it starts reacting to it. So a lot of the...the markets will continue to price in, you know, this elevated geopolitical risk. It does it all the time. And it really is waiting for a path towards the de-escalation for it to actually find its ground once again. But what I'm saying is like, I think most of the damage has already been done, if there was any sort of damage, because we are now in a conflict. And it's more now a question of how do we get out of this conflict? What is the solution? And I wanted to point out, and I think it's important to point out, that part of the reason why we may not be as concerned, going back to Kim's initial thoughts and comments, is because the stock market is amazingly resilient. The financial markets are amazingly resilient in past conflicts. you don't need to look too further. mean, and they always say, you we have to say past performance is not indicative of future results, but you look at a chart for the last hundred years and you can find no less than 30 or 40 different geopolitical events that may have had a impact on the market, but temporarily. They're always temporal. And the market yet continues to reach new highs.
Carolyn Rowland: Mm-hmm.
Victor Gaxiola: consistently even beyond. As a matter of fact, in many cases, the year after or even three years after any specific geopolitical shock, whether it was the current Israel-Hamas war, the current event now, you can look at when Russia invaded Ukraine, you can look at terrorist attacks on the United States, you can go back as far as the Cuban Missile Crisis. And in all these events, you look at the performance of the market one year later and surprise Surprisingly, is sometimes in double digits. So this isn't new. Like Kim said, we've been experiencing this for the last 100, 150 years or so. For as long as the financial markets have existed, in the end, it's resilient. And it gets past these geopolitical shocks. So I want to say, just a cautionary note, it's natural to feel concerned, obviously, about conflict. No one likes conflict. We certainly don't want boots on the ground in Iran if we can all avoid that because that impacts families' lives and there have been some lives lost on all sides and our hearts go out to them. But when it comes to focusing on economics, focusing on investments, focusing on people's portfolios, which we're responsible for, we're not as concerned because we have historical precedents that basically tells us we get through this. And so do not be thrown into a knee-jerk reaction based on headline risk.
Kim Gaxiola: And to that end, you know, you can say it's so easy to to define the start of any conflict. Very hard to define the end of that conflict for so many reasons we're not going to get into. We'll let political heads talk about that. But I think it's easy to see also that
Victor Gaxiola: Mm-hmm.
Carolyn Rowland: Mm-hmm.
Kim Gaxiola: As soon as one of these conflicts start is when you see the bounce in the market, right? That knee-jerk reaction is the market is going to sell off for because of uncertainty and fear. But when we look at the data, you know, the numbers 365 days later, even sometimes 90 or 180 days later, it doesn't reflect that initial start date. And if it does, it's for economic reasons. And so I'm just thankful we have the data. If that is something you're looking to comfort yourself, there's plenty of data out there. And gosh, with AI, you could probably just do a query and ask that yourself and get some very good analytical data to say, As soon as a conflict starts, yes, there is a knee-jerk reaction and a lot of times it is a sell-off in the market which causes the markets to go down. That's temporary. And, you know, if we are investors for the long term, we would say buy low, sell high. And so don't let the emotions make you do something reactionary with your portfolio. We never want our emotions to guide our investments.
Carolyn Rowland: Very well said.
Victor Gaxiola: Yeah, so as far as like Kim well said, and I think that when it comes to like specific calls to action, if you are feeling concerned, if you do think, you know, that this is something that you would like to talk about. That's what our team is here for as well, to have these conversations. Like Kim said, we have the data that kind of helps manage that narrative. That kind of is a counter to a lot of things you may be seeing in the financial news media, which is obviously going to be a whole lot more negative. And then the corollary to that is sometimes situations like this do create opportunities. So if certain valuations, for companies have been elevated as it begins and this provides an opportunity for some of them to go down in price. There might be an opportunity here to get in on quality companies at a lower price point. So there are opportunities for people to move money that might be or cash that might be in the the sidelines back into the markets just because there is a historical precedent and seeing growth following events like this, especially I think once a solution or at least a resolution seems to be in the horizon. So we've been seeing day-to-day fluctuations of the market and sometimes it is based completely on that sentiment when there seems to be some optimism that the market reacts favorably to that information and news. But I think just to kind of put a bow on it, I want to reinforce everybody that this is one of the primary reasons why A, it's important to have a diversified portfolio. And B, that's why within the individual investments within that portfolio, they are quality holdings that are resilient and can withstand whether it's a short-term, mid-term, or long-term kind of impact as it relates to this current issue with our Iran-U.S. conflict.
Kim Gaxiola: Yeah. And remember, I will always be an optimist, but I look forward, not in my rear view mirror. I want to know where things are going. And that is more important when we talk about our portfolios. And, you know, I'm going to end this on a high note and say there are a lot of exciting things that are happening out there with innovation. And it's a period of time where, you know, after all of the insights we've received from our analysts, I'm really excited about the future.
Victor Gaxiola: I like that. think we should end it there on a note of optimism. So we discussed the resilience and we can talk about the opportunity. But again, I just wanted to say, thank you. This was a timely subject and we thought that the podcast would be a good way for us to discuss this. So if you're an existing client of ours, just to know that we are certainly monitoring the situation we typically do, but we are not.
Carolyn Rowland: Yeah, optimism.
Victor Gaxiola: as concerned as you would think, just based on the sentiment and if you were to watch the financial news media. But that's not to say that your feelings of concern are invalid, mean definitely valid. And so reach out to our team if you'd like to have a conversation, we can go through it and share some of the data that kind of helps support the narrative and I guess our optimism. And if you aren't working with us and you'd like to learn more about how we do structure portfolios and specifically how we help people manage for their future, click. Click the link on the show notes and schedule some time with our team. So thanks, Kim. Absolutely. So thanks, Kim. Thanks, Carolyn. And we'll see you next time in the Resilient Investors podcast.
Kim Gaxiola: We would love to hear from you.
Kim Gaxiola: Thanks, Victor.
Carolyn Rowland: Thank you. Take care.