Over the past several weeks, tensions in the Middle East have intensified, raising concerns about energy supply disruptions and the potential for broader regional conflict. Peter and Jeff discuss the ongoing conflict with Iran and what it may mean for investors. Plus, get their tips of the month.
Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. Today we’re covering the story that’s really dominating headlines and markets right now, the conflict with Iran and what it means for investors. You’re seeing, over the past couple weeks, tensions in the Middle East intensify, which raises concerns about energy supply disruptions and the potential for a broader regional conflict, the biggest pressure point being the Strait of Hormuz, which is a narrow shipping lane that carries roughly a fifth of the world’s oil. Any threat to that can certainly have implications for the market, for sure the price to crude oil, and Peter, I’m curious. As you think about this in terms of the market, what are you seeing?
Peter Mallouk: You know, it’s fascinating all the things that have happened in the first quarter. And obviously what’s dominating the headlines right now is the war with Iran, and specifically the Strait of Hormuz, as you point out. So what’s the big deal about this? The big deal about this is the world runs on energy. Can’t operate any country without energy. It’s something everybody needs. The Chinese, the Russians, the Americans, Africans, everybody, and about 25% of all of the oil and gas and fertilizer goes through that strait. And with Iran stifling the strait, Yemen potentially going to expand this, make it even harder, we’re seeing oil prices rocket.
Oil prices impact everybody, because when you get a cheeseburger at McDonald’s, it had to show up there on a truck that used oil, and the farm used energy to produce all the different products that McDonald’s gets. So everything that you get, whether it’s a toy at Walmart or a meal at a restaurant or filling up your car tank, which is the most direct example, you’re going to feel the price of oil. It’s literally a tax on everybody. And what we’ve seen in parts of the country, gas is $4 a gallon or more, which it hasn’t been since Russia invaded Ukraine, which also impacted, obviously, with Russia being a big producer, energy prices.
So this is a very big deal, and the IMF, the International Monetary Fund, has talked about if this is prolonged or expands, they anticipate high inflation, because higher oil prices, maybe McDonald’s doesn’t raise the meal for a while, maybe the gas station doesn’t raise the price for a minute, but eventually it gets built into the price and that becomes inflationary, which then can trigger a recession. And so the market’s reacting to this in a fascinating way.
So first, if we go, “Who’s getting hit the hardest?” We’re seeing international stocks, Europe, Asia, getting hit the hardest. Why? Because of that 25% of the Earth’s energy that comes through the Strait of Hormuz, a disproportionate amount of that is going to Asia and Europe. It impacts all of oil prices because now Asia and Europe have to get their oil from somewhere else, but those countries, those markets and those economies, are getting hit harder, as the markets there anticipate a higher likelihood of recession in those countries. The United States is also getting hit hard but not as hard, with the U.S. stock market down almost 10%, if we were to look at the S&P 500. But if you look at a bigger picture, there’s a whole other story happening in parallel to this, and that’s what’s happening with artificial intelligence and tech stocks.
So if we look at artificial intelligence, we saw some developments, particularly from Anthropic’s Claude, which is the equivalent of OpenAI’s ChatGPT or Google’s Gemini or Microsoft Copilot. Basically came out with something that made it seem very, very easy to create software, which made software companies like Salesforce and Oracle get hit very, very hard as the market started to think, “Hey, maybe someone can use this artificial intelligence to create an alternative at a very low cost. Maybe businesses will switch to the alternative to lower their annual costs.” And what used to be seen as the most favorable companies — tech companies, which can scale, but also are based on subscriptions every year — got hit the hardest. So we started to see companies like Salesforce, Oracle, down about 50%, companies that lend money to them down a lot too.
So we look at the U.S. market. When we look at international, Asia, all hit the hardest because of oil. If we look at the U.S. market, tech stocks are in bear market territory. If we look at the Magnificent Seven, almost all those stocks are down 20% or more, some hit very, very hard. Some big tech stocks down as much as 50%, Palantir down 30-something, Oracle down 50 or so. But if we look at why the market’s holding up, because the rest of the market’s doing pretty well, people have rotated away from stocks that can be threatened by AI to companies that won’t be threatened by AI, like consumer goods.
And then of course, energy is soaring, up over 25%. Two reasons. Before the Iran war, money was rotating there anyway because it looks AI-proof. It looks like something that AI won’t hurt, so money was rotating over there. And then second, the inflated oil prices have made these companies, at least for now, more profitable. So energy in the U.S. has really, really soared while this is happening, so you have multiple layers of stories all happening at the same time.
But I think the biggest story is the market has held up pretty well, all things considered. Markets hate uncertainty. The Trump administration is creating persistent uncertainty. You literally have no idea any given morning what’s going to happen with anything, right? Tariffs, a new initiative, a war, you just — you don’t have any idea. And so the market has that, but then you add on the war, which can go sideways from here very fast. You have a bombing of an oil field in Iran, and you can see oil prices go to $200 a barrel. You will have a very big hit. I wouldn’t use the word crash, but a very, very significant hit.
A lot of uncertainty with the Middle East, and of course, a lot of uncertainty with AI. And despite putting all of that uncertainty together, the market’s holding up pretty good. Why? Because earnings are still there. Companies are still doing well. We’re not really seeing the collapse in earnings that you would normally see with all of this information. Companies are still doing better this year than they were doing a year or two ago, and as long as we can get out of these messes in a reasonable amount of time, we would likely see a swift recovery. If you have an expansion of the war where supplies are further halted for any reason, I think you could see this get much worse, much quicker.
So there’s a lot of variability available. The market now, if you look at the way the bond and stock market are priced, they’re anticipating this resolves itself in weeks … not three or four months, but weeks … and that it anticipates that it will be resolved without getting too much worse than it is today. Whether it’s right or not, left to be seen.
Jeff: And that’s historically what you’ve seen when it has been more of an event-driven market downturn, as opposed to more of a cyclical-type thing that you would otherwise see. It is shorter-term, for sure. But for the average investor watching this unfold, how should they be thinking about positioning? That kind of geopolitical stock historically ends up … Is it a buying opportunity? Is it you should wait and see? What do you think?
Peter: You know, there’s always been a big difference in the way wealthy people invest and the way someone getting started invests, and wealthy investors are always very strategic. You know, what money should be in bonds? What money should be in stocks? Which money should be overseas? Which money should be in the U.S.? And so on. And someone starting out is very tactical, like, “Oh, how do I exploit this? Should I go to Bitcoin or should I go to oil? And then should I rotate when the war’s over somewhere else?” And the wealthy investor ultimately wins in the long run, because you can’t time these things.
A case study of this is the last three months. No one in the world was predicting, coming into this year, that tech stocks were going to get hit the hardest because of the AI revolution. It was quite the opposite. People anticipated tech to go crazy, but now we’re starting to see that AI makes these recurring-revenue tech companies very vulnerable. No one would’ve expected energy to be the leader this year. Unbelievable. International stocks beat the U.S. by the widest margin in decades last year. Most people would not have anticipated the weakness we would see in Asia and Europe because of what’s happening in the Middle East now.
So this is a case study on why it pays to be diversified. The diversified investor right now, year to date, the portfolio’s holding up really well. You’re looking at tech stocks over 20% off their highs. Cryptocurrencies are down 50% to 80%. All of these things are happening, but the diversified investor’s very, very close to breakeven in the middle of all this chaos.
Jeff: Yeah. Another check in the “yes” category for diversification, no doubt about that. If you had to pick one or two indicators for those people that do watch the news regularly or maybe paying closer attention to their portfolio to see is this more of that event-driven or is it becoming a real economic thing, what do you look to?
Peter: To your point, we have an event, we have a transformation, and then we have earnings. So the event is what’s going on in the Middle East. If that expands, the market will get very bad. If we get an end to this very quickly, you’ll see a very sharp recovery, most likely, in the market. It won’t take years to recover its losses. It will come in days or weeks. Then you have the transformation of AI. This is going to be an evolution, where we’re gonna see mega winners and mega losers. Companies that we just thought were unbeatable and formidable are gonna crumble because of AI. We’re gonna see an even bigger case to be diversified.
But the long-run investor, the stock market only cares about one thing, and that’s expected future earnings. And if you’re diversified, AI is going to drive earnings. It’s going to make companies more efficient, and the winners are going to win very, very, very big, and the diversified investor’s going to win because of it. A lot of people said, “Oh, a year or two ago, someone who owned the S&P 500, they just did well because Nvidia rocketed.” Well, that’s the point, right? The point is Nvidia was in the S&P 500, and when it rocketed, the diversified investor had that needle in their haystack, and it lifted the overall returns. Years before that, it was Google, it was Apple. It has also been companies like Southwest Airlines that have led the S&P 500.
So when you own that diversified basket, you’re going to own that next company that comes out of nowhere most likely, that lifts up the entire index. We’re gonna see huge winners, big losers. Of course, we’re gonna have the normal corrections and bear markets along the way, but I think with the velocity of the markets and the speed of transformation, it makes more sense now than ever to not be trying to be overweighted in one sector, one country or one strategy.
Jeff: You want to capture the entire upside, no matter what area it’s in. With that, let’s move to our tip of the month. Peter, what do you have for us?
Peter: All right. Mine’s pretty boring, but I saw it come up recently with clients, so I share it with everybody. So a lot of people will go shop. They’ll get their home insurance through one company and they’ll get their umbrella coverage through another company. You know, home insurance, that’s obvious to everybody. You know, your home burns down or something, the home insurance will pay for it. Umbrella insurance is more someone falls down the stairs and it’s not covered by the homeowners, or someone slips on your sidewalk and it’s not covered by the homeowners. You don’t want those to be from separate companies, because what happens is when an incident happens, the homeowners insurance will say, “Hey, go talk to the umbrella coverage people,” and the umbrella coverage people will say, “Go talk to the homeowners.” Make sure those are from the same company, even if you’ve got to pay $30 more to do it, just make sure they’re from the same company.
Jeff: Yeah. That coordination of coverage between the two to make sure there’s no gap in coverage, very important.
Peter: How about you, Jeff?
For me, I’m going to bring up the idea of two-factor authentication for people, and in many places, you don’t even know it but this is already turned on for you. So maybe you’re logging into your bank account or maybe you have your umbrella and homeowners coverage through State Farm and they are sending you a text message each time you log in with a code. You then enter the code to log in to the website. That’s what’s called two-factor authentication. And the likelihood of someone getting into your accounts that you don’t want in there goes way, way down the more you have two-factor authentication turned on. So across all of your online accounts, my recommendation, my tip for this month, is to make sure it is turned on in as many places as possible.
Peter: Yeah, 100%, and not just financial. Like healthcare record, everything you possibly can.
Jeff: Yeah. Your email, your Netflix account. All of them have this available, and you should certainly turn it on. Thanks for listening. I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me has been Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
