Learning from history: Are US stock investors better off staying on the sidelines amid Middle East conflicts?

Caixin March 5 News (Editor Ma Lan) Geopolitical conflicts have always been considered the greatest uncertainty in the investment world, often rewriting the entire market’s investment logic overnight. The recent outbreak of the US-Israel-Iran conflict at the end of February is the latest example.

However, according to a study, the U.S. stock market generally trends upward during U.S. military operations, with occasional setbacks but never stopping. This suggests that remaining patient during market turbulence and diversifying investments across other markets may be the best strategy, as panic usually leads to failure.

Jeffrey Yale Rubin, president of independent stock market research and investment firm Birinyi Associates, noted in his research that after analyzing recent U.S. military actions lasting more than a day, the S&P 500 index has averaged a 12.5% increase within a year of conflict outbreak, with an annualized return of 9%. This indicates that military conflicts surprisingly boost U.S. stock returns.

In other words, Rubin believes that although stock markets often decline in the weeks following U.S. involvement in conflicts or other geopolitical shocks, stock prices tend to rebound quickly. In the long term, controlling costs and sticking to stock investments are worthwhile.

Long-term Investors While the data is surprising and may effectively guide investors’ decisions, it contains risks that cannot be ignored. The “buy and hold” strategy, which involves remaining passive, relies on an important assumption: that the future will resemble the past, meaning that what is happening in the Middle East now will not cause irreversible disasters worldwide.

However, the Trump administration has repeatedly ignored conventions, and its actions could lead to unpredictable market consequences. Additionally, the past two years of intense investment in artificial intelligence have made U.S. stocks highly concentrated and overvalued, making risk assets particularly vulnerable to shocks.

Beyond the stock market, Rubin also discussed the oil market. He found that one year after the start of military actions, Brent crude oil prices typically rise, with an average increase of up to 27%, often triggering higher inflation.

Analysts expect that if the US-Israel-Iran conflict can be resolved quickly, and energy infrastructure and the natural environment are not severely damaged, the impact of rising energy prices may be alleviated as shipping through the Strait of Hormuz resumes. However, a prolonged closure of the Strait could have serious consequences.

Nevertheless, the U.S. economy’s dependence on oil is now much lower than 50 years ago. A prolonged and large-scale oil crisis could be painful, but since the U.S. is now a net exporter of oil and natural gas, the energy industry might benefit unexpectedly.

In summary, while uncertainties could lead to adverse outcomes, long-term investors might profit by ignoring conflicts. As long as the economy remains strong, companies may find ways to profit and return gains to investors, even if military conflicts cause short-term economic weakness.