When I was released from the army in 1974, I had been assigned to the Command Operations Center – the War Room – for US Army Alaska. We made war plans, executed war games, and analyzed their outcomes. One thing I learned during that period, is that regardless of how good the plan, everything changes when the shooting starts. The number of variables becomes mind-boggling, rather like investing.
With the recent news being dominated by the war in Gaza, and its fallout around the world, many investors are wondering what the effect on their investments will be. Some are asking (in the ghoulish spirit of Halloween) is there a way to profit from potential market moves?
One might be tempted to go back and look at how stocks from various industries performed during past wars, trying to infer what they might do today. However, no two wars are alike, so few investable conclusions can be drawn. Allow me to illustrate.
In a general playbook for war, the price of gold is expected to go up. The war in Ukraine did see gold prices spike 8% in two weeks after the Russian invasion, but immediately thereafter started a six-month slide that saw gold prices fall by 21%. As of this writing on October 20th, the price of gold has risen 7.89% since Hamas attacked Israel on October 7th. That is a nice gain for gold, but not the kind that fortunes might be made on.
Commodities Indexes, which include wheat and oil, jumped when Ukraine was invaded, but have drifted sideways to down since then. Commodities have risen since mid-2023, driven by rising oil prices. War in the Middle East should always make us worry about oil supplies becoming disrupted, and since our administration has drained our Strategic Petroleum Reserve to only 17 days of US oil demand remaining, I would say the energy sector is one of the safer bets today.
Defense stocks come to mind as well. However, the S&P Aerospace and Defense index fund (Symbol: XAR) is only up 3.29% since Russia invaded Ukraine. Will that change if the Middle East war drags on or spreads to other areas? Probably, but no one really knows whether that will happen or to what degree. XAR spiked 7% in the week following the Hamas terror attacks, but has drifted lower since.
US Treasury Bonds could be an interesting play during this environment. Treasury bonds have always been considered a safe haven in uncertain times, and today’s yields in the 5% range are much more attractive than 2% at the beginning of last year. So, I would expect some buying of Treasuries if the war expands.
However, the newsletter Forest For The Trees mentioned that “Seven Fed officials in nine trading days say higher bond yields may have finished the Fed’s job (raising interest rates) for them.” I don’t believe it. With a coordinated set of talking points being floated, as these seem to be, I think the Fed is losing control of the interest rate markets. Declaring victory and dusting off their hands is their fig leaf.
Increased demand for Treasuries due to the war might help hold rates down and bond prices up, but in my opinion, the costs of war will drive the Treasury to borrow more, requiring more bonds to be sold. If bond buyers don’t step up right away, yields will have to increase to attract them, so it is possible to see more losses in the bond market even with Treasuries traditionally having safe-haven status.
What is the market telling us? Looking at the stocks of 424 US companies that are valued at $1bn or greater and have out-performed the S&P 500 Index since the Hamas terror attacks on Oct 7th, through October 19th, Fasttrack data shows the sector with the largest number of issues passing the screen is Energy. Bond ETFs have lost money since Oct 7th so did not pass the screen. So much for a flight to safety.
My advice? Don’t bet the farm on anything related to the wars going on. Stick to your plan. At Shadowridge, that plan includes using investments that Adapt to Changing Markets® so you can quit worrying about your investments during world events like wars, bear markets or government shutdowns.
If you or a friend of yours would like to learn more, please call the office at 888.434.1427 to schedule a portfolio review.
