Investing for the War
As investors, we may as well skip beyond the debate over a Syrian strike and focus on the economic impact of a regional war in the Middle East. Let?s face it? Syria will not only be struck it will be attacked, as the third and final stepping-stone to the ultimate target ? Iran?s nuclear facilities. Afghanistan and Iraq were the first two steps, conveniently bordering Iran. Syria is not so much a military target as it is political target to draw allied Iran into war.
Let?s not be naïve about it ? there will be war. So let?s just prepare for it.
The chart below shows how crude oil, gold, and equities have been reacting to all the talk on a possible strike against Syria over the past 10 trading days from August 23rd to September 5th.
(Substituting for oil is United States Oil ETF (NYSE: USO) in black for gold is SPDR Gold Trust ETF (NYSE: GLD) in beige for equities is SPDR S& P 500 Trust ETF (NYSE: SPY) in blue. Click to enlarge.)
Source: BigCharts.com
On Monday, August 26th, when U.S. Secretary of State John Kerry addressed the U.S. position favoring a strike on Syria, oil and gold surged, while equities fell. Then, from Wednesday the 28th, as opposition to a strike grew across the international community, both oil and gold starting giving back some ground, while equities slowly improved.
From this, we see that the prospect of war adds a premium to the prices of oil and gold. In oil, there is the anticipation of increased consumption and decreased production due to supply-line interruptions. In gold, there is the anticipation of currencies under pressure as commerce falls and national debt rises.
However, equities follow the inverse trend of reeling on the anticipation of war and then rallying on the event. As a recent example, the invasion of Iraq in March of 2003 marked a turning point in U.S. equities, officially ending the 2001-03 correction and mounting a stellar rise for over five bumper years until the housing crisis.
For equities, the uncertainty of war is more detrimental than war itself. Once the uncertainty is removed, investors know where to put their money, and the markets take off.
Yet we still need to anticipate which sectors of the equity market will outperform the rest. Obviously, any company that generates income from wartime activity will benefit most. These include defence contractors, such as Lockheed Martin Corp. (NYSE: LMT), Northrop Grumman Corp. (NYSE: NOC), and Boeing Corp. (NYSE: BA). Plus oil producers, such as Exxon Mobil Corp. (NYSE: XOM) and a whole host of petroleum companies.
Just don?t leave out basic consumer stocks, such as retail stores, clothing, and electronics. War employs more workers, which gives them spending money that moves into every corner of the economy.
If simplicity is your comfort, you can easily protect your portfolio from the ravages of war with those very three ETFs in the graph above ? USO for oil, GLD for gold, and SPY for equities. If you hold any Middle Eastern stocks or currencies, though, seriously reassess their weighting, as the risk in such holdings has greatly increased.
Economists now need to reassess everything. Any sign of war may force the U.S. Federal Reserve to rethink its bond buying exit strategy and timing. Stimulus may not be on the way out anymore. The landscape has changed our maps are now outdated. From here on out, we need to plot a new course.
Joseph Cafariello
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