Market Overview
Separating our rooting interest from our betting interest
It’s football postseason time, and we know a lot of our readers are Dallas Cowboys fans. We want you to whoop and holler and cheer on your team. But, speaking as a friend and not as a financial advisor: Don’t bet on the ‘Boys.
We’re blessed with memories of those Roger Staubach and Danny White seasons. We also recall the return to form when Troy Aikman led Emmitt Smith and Michael Irvin onto the field. But let’s face it: This year, they’re just the beneficiaries of the Philadelphia Eagles’ epic late-season choke, the only viable team in the once-vaunted NFC East.
What does any of this have to do with your portfolio? Nothing. And neither do the wars in Ukraine or Gaza, regardless of which side any of us favor. And that’s our point.
Win, lose or draw
“Of ~20 post-WWII geopolitical events, only the Arab-Israeli War of 1973 ended up being a primary driver of equity markets 6-9 months later,” J.P. Morgan investment strategist Michael Cembalest wrote recently. “In addition, the Geopolitical Risk Index hasn’t been very useful for investors either, possibly since the world’s conflict regions typically represent a small share of global output, equity market capitalization, bank lending, portfolio investment, trade, energy production and capital formation.”
Noting that we’re in the middle of an Arab-Israeli war right now, it looks like Cembalest’s broader point still holds for a couple reasons.
First, OPEC is on our side this time, or at least the oil cartel is not openly hostile to America. Nobody has turned off the spigot. And even if they did, the U.S. is now a net exporter of crude oil to the tune of 1.2 million barrels per day and is much better prepared for that contingency than it was 50 years ago. Also, demand for petroleum products here has remained flat over the past half century, undulating with the business cycle. With all the current emphasis on alternative sources of energy, it’s not likely to go up.
So whether your sympathies are with the Israelis or with the Palestinians, whether you call for a humanitarian ceasefire or for Hamas to be obliterated, whatever happens will probably not have a direct effect on your portfolio.
If you view the Russia-Ukraine conflict in strictly financial terms, there’s not much going on there either. The world’s 11th-largest economy is picking on the world’s 58th-largest. We import about $30 billion worth of goods from Russia, mainly raw materials, and export about $6 billion worth of goods, mainly vehicles and appliances. We do even less business with Ukraine. When you consider that the U.S. trade deficit is approaching $1 trillion per year, that’s a rounding error.
Again, whether you want to see an independent Ukraine in NATO and the European Union, or you want to see stability return to the region’s Cold War borders, or you want to see a land-for-peace deal, remember: You don’t keep your heart in your wallet.
Disruptions
That’s not to say there won’t be short-term effects. Remember the inflation that was fanned by supply chain disruptions as the pandemic faded away? We’d be very surprised if events in the Arab world don’t cause more of that.
With Houthi militants interfering with shipments in the Red Sea, major shipping firms are steering clear of the area. That means sailing container ships around the entire continent of Africa rather than through the Suez Canal. This adds not just time and expense to the journey, it adds complexity and confusion to the businesses waiting for that cargo.
And even though we don’t buy a lot of wheat from Ukraine, other countries do. That war-torn nation is still managing to produce and export grains and legumes, but at much-reduced levels. Higher prices for these commodities overseas could eventually lead to higher prices here.
War and peace
Still, these are minor considerations in the grand game of geopolitics and, if you have a well-balanced portfolio, they should be minor considerations in your retirement planning.
That is, if things don’t escalate out of control.
“[A] dramatic expansion of the war in the Middle East, a direct Russia-NATO conflict or a China-Taiwan conflict would obviously change these dynamics substantially,” Cembalest notes.
You might want to talk with a trusted financial professional to determine how to best hedge against the worst as we all hope for the best. Otherwise, you might fumble like Leon Lett.
