Navigating a New Geopolitical Landscape: An Update for Investors
As many of our clients approach or continue through retirement, we understand that geopolitical events may heighten concerns about financial stability. Our goal is to provide clarity and confidence, drawing on decades of experience navigating similar challenges. The recent joint military strikes by the U.S. and Israel in Iran have introduced a new and challenging dimension to the global landscape. These events are unfolding rapidly, and the immediate reactions in the financial markets—from surging oil prices to a flight toward so-called "safe-haven" assets—are understandable. During times like these, we must anchor our decisions not in emotion, but in a clear-eyed assessment of the situation, historical context, and the foundational investment principles. We are carefully reviewing these developments and evaluating their potential implications for your financial strategy.
The Market's Reaction to Geopolitical Conflict: A Historical View
Headlines about military conflict are always unsettling, and the initial market response is often a "knee-jerk" sell-off as investors grapple with uncertainty. However, history provides a valuable lesson: while geopolitical shocks can cause short-term volatility, their impact on long-term investment returns has historically been limited.i
An analysis of U.S. airstrikes in the Middle East and North Africa over the past four decades reveals a consistent pattern: markets tend to react to the initial uncertainty but recover more quickly than many expect. Research shows that following an initial shock, U.S. stocks declined while oil, gold, bonds, and the U.S. dollar rose. However, just eight weeks later, stocks had moved higher ninety-five percent of the time. Oil prices remained elevated only one-third of those instances.ii
Similar market action occurred during more extensive conflicts. For example, following the initial U.S. military operations against Iraq in January 1990, U.S. stocks fell over 5% in two weeks. But by mid-March, stocks were up around 1%. Similarly, stocks dropped nearly 12% following the September 11th attacks, but by early November, pushed into positive territory for the remainder of the year.iii
More often than not, it is the underlying economic fundamentals, such as economic growth and corporate earnings that drive stock prices over the long run.
The Oil Price Wildcard
The most immediate and significant economic consequence of the current conflict is the sharp increase in oil and natural gas prices. Iran's strategic position, particularly its ability to disrupt traffic through the Strait of Hormuz—a chokepoint for roughly 20% of the world's oil supplyiv—is a primary concern.
A sustained period of high oil prices could ripple through the global economy. This means higher gasoline prices for consumers, which can dampen spending in other areas. For businesses, it translates to increased operational and transportation costs. This has the potential to fuel inflation, complicating the job of central banks like our own Federal Reserve, which has been encouraged by cooling inflation figures. Fortunately, the Fed tends to focus on "core" inflation, which excludes volatile food and energy prices, so a temporary spike may not trigger an immediate policy shift. The key variable here is duration; a prolonged conflict that keeps oil prices elevated poses a more significant risk to economic growth.
Should oil prices remain around $100 or above for an extended period, U.S. GDP could slow by 0.5%-1.0% and headline inflation could rise by roughly 0.5%.v For clients in our diversified portfolios, holdings in commodities (such as oil), and Treasury Inflation-Protected Securities (TIPS) are designed to buffer any adverse impacts, as they’ve historically gained during periods of oil spikes.
The Sweeping Promise of Artificial Intelligence
The transformative power of Artificial Intelligence (AI) remains a dominant and powerful theme. The investment boom that defined 2025 is not only continuing but expanding. Capital spending on AI infrastructure is projected to nearly double this year, with the largest cloud and AI providers expected to spend upwards of $700 billion.
Importantly, we're seeing a broadening of this AI investment. While building data centers is still a priority, the investment focus is increasingly shifting to the application of AI in industries like healthcare and finance, as well as the physical infrastructure—like the electric grid—needed to power this revolution. This expansion is creating a wider set of investment opportunities beyond the well-known tech giants.
Staying the Course
While the current geopolitical situation requires our full attention, it does not demand a departure from our long-term strategy. History teaches us that while markets react to conflict, they ultimately reward discipline and a focus on fundamental growth. The high valuations in parts of the U.S. stock market underscore the need for earnings to grow, and the trends in AI and international markets point to encouraging opportunities.
Our commitment remains to navigate these turbulent waters by adhering to the time-tested principles of diversification and a long-term perspective. By preparing for a variety of outcomes, rather than trying to predict the future, we build resilient portfolios designed to adapt to market conditions and potentially participate in growth opportunities. We will continue to watch trends closely, ready to make prudent adjustments to guide your investments toward your financial goals.