The Israel-Iran conflict is the latest geopolitical event attempting to scare us out of this bull market.
There were plenty of headlines heading into the last full trading week of June, including retaliatory measures from Iran that suggested a potential closing of the Strait of Hormuz.
Providing the sole passage from the Persian Gulf to the open ocean – and one of the globe’s most strategically important choke points – a closure to the strait would represent a significant strain on oil supplies. But Iran would be committing self-harm, as a complete closure would severely impact their own oil exports and economy.
Markets appear to have sorted things out as they often do. Iran launched missiles at a US air base in Qatar yesterday, which apparently were “telegraphed” that gave the US sufficient notice. Stocks responded well to what was considered limited retaliation.
And while a potential truce between Iran and Israel has been tested in the past 24 hours, we need to keep things in perspective.
The stock market is an enigma. It wants to humiliate me, you, and as many people as possible for as much money as possible, and as long as possible. Our goal is to engage the market while not letting it humiliate us, and to generate an acceptable rate of return in relation to a given level of risk.
Today, the market’s best tactic is to scare us from the coming rebound. Investors nearly always doubt new bull markets, often for years after they begin. They frequently wonder – how we can possibly be in a bullish period when everything is so bad out there?
And often times things are bad. But stocks don’t necessarily move higher because things are improving (in some cases they do). Rather, they climb because everyone expects the worst.
These types of foreign conflicts are always tragic. We certainly don’t want to minimize them in any way, shape or form. But from an investment standpoint, it’s important to keep in mind that markets have a way of moving past geopolitical events fairly quickly.
The Israel-Iran conflict is just the latest example. It’s yet another reminder (among countless historical cases) to trade the market’s reaction, not the news headlines. Should it really escalate to the point where it truly affects stocks, then we can regroup and adjust our outlook. For the time being, the trend remains up, and we need to be aligned with it.
The S&P 500 SPY is now less than 2% away from its prior all-time high. It pays to listen to the market instead of trying to predict what will happen.
