War in Iran, Stocks at Home

Nobody who understands the investment markets was surprised by the recent drop in stock prices just days after war broke out in the Middle East.  Those who follow economics were completely unsurprised that when a country that normally produces 15 million barrels of oil a day goes offline, oil prices (and prices at the pump) would jump unpredictably.   

The add-on effects higher oil prices ripple through every part of the economy, basically raising costs for any manufacturer who uses energy (basically all of them) and denting the pocketbooks and wallets of consumers when they fill their tanks.  Consumers who have a bit less money in their pockets might be inclined to spend less and drive less economic growth.   The question one might ask is: how long will this war last—and therefore how long it will continue to erode corporate profits and slow the economy?

Of course, only the people in the White House Situation Room can answer this.  But the essential thing that investors should understand is that the market decline, currently and hypothetically in the future, represents emotional reactions driven by uncertainty and perhaps even fear.  

Fear of what?  War itself is frightening in its costs and tragic human consequences.  But from an investment standpoint, the missiles and drones flying around the Middle East are not diminishing the underlying value of companies owned in investment portfolios.  Small increases in costs, small decreases in profits, all if it probably short-term (and much of it offset by rebates of tariffs) are unlikely to have much of an effect.  

Somehow, our investment markets have managed robust long-term growth through wars, Presidential assassinations, the brink of nuclear war and a few other disturbing events that caused temporary panic.  It’s not hard to understand why.  Through it all, millions of people went to work each day, putting their shoulders to the wheel in order to create incrementally more value in the companies they work for, day by day, regardless of all the external distractions.  It turns out that corporate value and growth were independent of frightening headlines.

Many investors feared that the most recent ugliness (whatever it was at the time) would permanently damage their financial futures.  Those who acted on their fear and sold their investments inevitably missed the recovery.  Holding tight when the investment ride gets bumpy has, in the past, always been the superior strategy.  There’s no reason to think that the current war, awful and scary as it is, will be any different.

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