🪖 Navigating war

Hey hey, happy Monday.

Thank you SO much for all the comments, emails, texts, and phone calls on my money story over the past week. Your feedback means the world to me. But more importantly, it reminds me that I'm not alone in these insecure feelings, and neither are you. There’s so much more to explore here that the financial industry hasn’t covered. More on that front soon.

Also, a little programming note – there will be no OptimistiCallie on June 30. I’m taking a little summer break for the 4th of July (side note, how are we almost in July?!?).

Today, a 4-minute read on war. One of the hardest topics to write about on Wall Street, but we’re going there with a few (humanity-laced) truths today.

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Let’s get one thing straight.

I hate writing about war.

There’s something so hollow about opining on the financial effects of what is, first and foremost, a humanitarian crisis. It’s my industry at its worst, smiling for the camera and then talking about which missile manufacturers could thrive as two countries rain rockets on each other every hour of the day.

Luckily, I’m not in the stock-picking business. Or the hollow takes business, frankly.

But I know the thought of your portfolio has crossed your mind in recent days. Less than 48 hours ago, the U.S. announced it had bombed nuclear sites in Iran, and it’s all I’m reading about on social media as I swipe through this Sunday morning.

Markets, for what it’s worth, have reacted to these headlines. The S&P 500 fell 1.1% on June 13 on reports that Iran had retaliated after Israel’s initial attacks on their nuclear facilities. Our first summer storm.

War can cause thoughts of change and uncertainty to overwhelm your mind. How can you not go to a dark place when lives are on the line? It yanks at your heartstrings and bleeds into rational thought like no other event does.

With investing, the truth when it comes to war is awfully callous, no matter how you slice it.

Often, geopolitical conflict has little to no effect on the U.S. economy.

And if markets follow the economy and earnings over time, then it’s fair to say that war rarely has any long-lasting effects on the stock market.

Here’s a chart that proves my point well (from my colleague Michael Batnick):

Over the last two decades, there have been plenty of reasons to sell. To run and hide. To swear at god over how cruel this world can be. To swipe out of your phone and chuck it as far as you can.

But in a society seemingly gripped by fear, the S&P 500 has managed to grind out 13.6% in stock market gains per year since the beginning of the 2010s, powered by the strongest earnings growth we’ve seen in a century.

Your feelings are valid, and yet, the hard numbers will probably dictate where stock prices go next. War is a balancing act between honoring your humanity and staying true to your financial goals. It’s a tricky dynamic.

This is especially true for the Israel-Iran conflict. The U.S. has had sanctions on Iran in some form or fashion for decades, so our reliance on Iran is insignificant. In 2023, the U.S. imported just $2.2 million in goods from Iran, a tiny fraction of the $3.1 trillion we brought in from other countries.

War, however, can become dangerous for our economy when it severs vital trade channels with us and other major regions.

Russia’s invasion of Ukraine was particularly impactful given how important both countries were for oil and agricultural trade around the world.

Iran doesn’t serve nearly the same significance for world trade. But it does play an important role for one of the world’s biggest economies.

Iran’s biggest industry is oil, and its biggest customer (by far) is China. In 2023, Iran made up 10% of China’s total oil imports. If Iran isn’t producing oil, then the world’s supply could get hit. Lower supply with unchanged demand equals higher prices. There’s no running away from basic economics.

Iran also controls the Strait of Hormuz, a narrow waterway through which about a quarter of the world’s oil trade passes. Shutting down the Strait of Hormuz would snarl trade even more, but it’s an improbable step (or at least that’s what the geopolitical strategists say).

Even though the U.S. is becoming more self-sufficient on the energy front, global oil supply is so intertwined that you can’t rule out higher prices at the pump.

We’re already seeing it, too. The price of crude oil has jumped over 20% this month, and the price of an unleaded gallon of gas rose the most in two months this week (through Thursday). Sure, that’s an increase of seven cents a gallon, but the trend is not what you want to see.

Especially right now, when people are so on edge about the economy’s future. 

On the surface, higher gas prices seem like a small annoyance. The Federal Reserve – that cuddly group of interest-rate nerds up in D.C. – swears up and down that they don’t consider gas prices when setting their benchmark policy rate. 

But higher gas prices mean smaller budgets for everything else at a time when people are losing their jobs at an accelerated pace, and tariff-fueled inflation threatens to squeeze our wallets even more.

Gas prices are also the poster child for inflation. They scream at you when you’re driving down the highway, and taunt you when you’re scouring your neighborhood for the best price.

Gas prices influence inflation expectations, and it’s been hard to disentangle the two in the past. Since 2004, about 80% of the biggest jumps in inflation expectations have happened alongside a spike in gas prices.

In fact, the largest jump in expectations happened in 2005, the same month gas prices soared during Hurricane Katrina.

The Fed’s hands are already tied because tariffs have scrambled the calculus for inflation. Higher expectations could force them to wait even longer for lower interest rates. And let’s be honest, lower rates are sorely needed here. 

This is the other tough truth that a lot of market experts tend to gloss over.

Conflict doesn’t happen in a vacuum when the world is so intricately connected.

There’s a lot of room for things to go wrong, and the consequences could eventually reach your portfolio. 

The Israel-Iran conflict alone probably won’t break your chances at retirement. Yes, even as the U.S. gets more involved.

However, war can introduce risks in other parts of your life that influence your financial decision-making. And if our decisions change on a collective scale, the shift could be enough to cause a ripple effect in the economy.

Just remember that change and uncertainty – even at unbearable levels – are constants in investing.

And you can only bet on the end of the world once.

Thanks for reading!

Callie

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