Articles

Initial Market Reaction: Measured, Not Panicked

Markets have digested the initial shock of the weekend's attacks more quickly than many feared. Equities have stabilized, and while oil prices have moved higher, the reaction has been orderly. This is consistent with what we observed in recent prior conflicts, including the U.S. operation in Venezuela and the initial Israeli strikes on Iranian nuclear facilities, where markets sold off before regaining their footing as the scope of the conflict became clearer. The real risk, as always, is not the initial strike. It is escalation.

There are some early signals suggesting this may not become a prolonged, region-wide war. Ammunition depletion is a genuine constraint on both sides, and history shows that munition stockpiles often determine when these engagements wind down. Russia is in no position to resupply Iran meaningfully, with its own stockpiles drawn down by the war in Ukraine, and China appears largely disinterested in playing an active role. These factors suggest a ceiling on how much external support Iran can draw on.

On oil, we have seen approximately an 8 to 10% increase in the price of a barrel, moving crude into the mid-to-high $70s, which translates to roughly a 10-cent increase per gallon at the pump. Global supply buffers are sufficient to absorb several weeks of disruption at this level. If the conflict extends into months, particularly if the Strait of Hormuz remains significantly disrupted, oil could move considerably higher. That is the scenario worth watching, but it is not where the base case sits today.

Why Diversification, Not Hedging, Is the Right Answer

Clients often ask how to hedge against the current environment. The honest answer is that hedging protects against a specific, identifiable risk. But the landscape today includes elevated AI valuations, geopolitical tension with Russia and China, political uncertainty, inflation, and a rapidly evolving Middle East conflict. No single hedge addresses all of that.

The right response to general uncertainty is diversification, spreading exposure across asset classes, geographies, styles, and sectors so the portfolio is not over-reliant on any single outcome. Portfolios heavily concentrated in U.S. large-cap growth have likely drifted beyond their intended risk profile after years of exceptional performance in that space. Now is the time to rebalance thoughtfully, and two areas we believe are particularly well-positioned to help are real assets and international equity exposure.

In most portfolios we build, we include real assets, which provide diversified exposure to energy, infrastructure, commodities, and real estate, asset classes that tend to rise alongside inflation rather than erode under it. Paired with international equity exposure across Europe, Japan, and parts of the emerging world, where valuations remain significantly more attractive than U.S. large-cap multiples, and a weakening dollar provides an additional return tailwind, clients can build a portfolio that is both better balanced and better positioned for the environment ahead.

The goal is not to predict the next crisis. It is to build a portfolio resilient enough to weather it and benefit from the recovery when it comes.

If you have any questions for us, please reach out. We’re here to help. 

Phone: (509) 525-2000

Email: portfoliomanagement@bakerboyer.com