• Most geopolitical shocks are brief buying opportunities unless they trigger total war or close markets.
• The real market threat is oil-driven inflation, which could prevent the Federal Reserve cutting rates
• The US benefits from geographical distance, while a surging dollar heavily pressures emerging markets

The successful killing of Ayatollah Ali Khamenei and a number of other senior leaders has happened with breathtaking swiftness.

However, this decapitation does not mean that the Iranian regime is over.

Much like a rattlesnake thrashing around for minutes after losing its head, the regime"s death throes could be violent and unpredictable.

Iran remains determined to inflict pain on its attackers, even if it cannot win a conventional war.

In the immediate aftermath – I find it distasteful to read market notes explaining that carnage and significant loss of life will probably not cost investors much money.

Yet, to survive the financial fallout of global conflict, investors must apply a psychological detachment, focusing on macroeconomic realities rather than giving in to panic.

What follows are the lessons I can draw from the latest escalation.

Don"t Give in to Panic

When a shock hits the geopolitical order, generally the optimists emerge triumphant.

Put another way, rarely do permabears come out victorious. 

Much research has shown that most shocks are brief and offer an opportunity to buy at reasonable prices.

To understand this through the mental model of inversion, we must stop asking "how bad will the war get?"

The better question to ask is "will this permanently destroy capital?"

The answer is no.

The Global Investment Returns Yearbook, a massive work of financial history guided by academics Elroy Dimson, Paul Marsh, and Mike Staunton, shows that over the last century, those who had the faith to buy stocks at a discount during crises enjoyed massive returns from compounding the risk premium each year.

However, as John Authers from Bloomberg highlights:

• To profit from this, it was necessary to work out in advance that outright conflict was at hand and to identify the winners. Further, while the 20th century"s two world wars both inflicted financial losses (and nobody is suggesting that these were remotely as grievous as the human costs), neither of them were as severe as any of the four greatest peacetime bear markets since 1900, as illustrated here

Geopolitics certainly matter at the extreme; their database shows that the countries that lost world wars or sustained particularly terrible damage did worst, while the victors and those who avoided conflicts did best.

Not surprisingly, total (economic) disaster also occurs when communist revolutionaries take over and close stock markets altogether.

However, history presents a counterintuitive truth:

• The bear markets starting in 1929, 2000, and 2007 all began in times of peace and economic expansion, and they helped to cause recessions.
• None of the financial losses inflicted by the 20th century"s two world wars were as severe as any of those four greatest peacetime bear markets.

Ultimately, economic fundamentals destroy more wealth than bombs.

Therefore, fundamentals should be our focus. 

The Oil Artery

Overnight, the price of WTI Crude leapt over $90 per barrel… ~60% higher than where we were just two months ago.

Despite the initial sticker shock, what I think matters most to markets (in the short term) is will this conflict affect the supply of oil?

Remember:

Coming into this war – there was an oil glut – resulting in WTI falling to its lowest level in 5 years. 

Regarding any potentially supply constraint – the key issue is the Strait of Hormuz, through which about 20% of global oil exports are transported.

If Iran wants to close them, it can, albeit at great financial cost to itself and other Gulf countries.

Even though Iran formally announced it does not intend to close the strait, commercial shipping has largely paused regardless because insurance underwriters withdrew war-risk coverage within hours of the initial strikes.

Consequently, the binding constraint on oil flows is currently the insurance market, not a military blockade.

Hubert Marleau of Palos maps out three scenarios:

1. A quick regime change restoring normalcy and bringing oil back to $60 a barrel;
2. A true Hormuz disruption that pushes Brent to a tail-scenario of $125 a barrel (i.e. the previous top in our chart); or
3. An escalating situation constraining supply and running the price to an ~$80-$90 peak.

From mine, the third is arguably the most likely (and where prices are heading into the weekend)

It is vital to remember the huge outlier of the 1973 Yom Kippur War, which triggered a massive bear market because it led to a protracted reduction in the supply of oil to the rest of the world.

Today, however, the odds are that the war burns out after a matter of weeks, as Iran"s store of weaponry is limited and its ability to extend the war depends on attrition.

For now, I think the market is pricing in either Scenario 1 or 3. 

Navigating the Fog of War

So far, the winner of this conflict has been America.

The S&P 500 for example is barely 3% off its all-time highs… virtually unmoved by the events in the Middle East

From mine, sheer geography plays a massive role.

For example, the US is protected by oceans on either side, while entities in Europe are far closer to the events.

This hurts them more.

Europe, for instance, has barely had time to recover from the natural gas price spikes of the Ukraine invasion four years ago, and now it is happening again.

Conversely, the US has almost completely shed its dependence on Middle Eastern oil (a good thing).

However, America"s financial victory might not last long if the war drags on for months on end (which is possible)

Rising commodity prices arouse fears of inflation, making it far harder for the presumed next chairman of the Federal Reserve, Kevin Warsh, to cut rates as advertised.

Take a look at this correlation between WTI Crude (orange) and Consumer Price Inflation (CPI) in blue

Whilst not perfect – there is a clear correlation. 

The fact that a new Federal Reserve chair will take office in two months, and is likely to be tested by the market, adds to the overall risk.

Furthermore, an oil spike or an overheating from fiscal and monetary ease would damage the optimism of global asset allocators who have been betting that inflation is beaten.

What About Safe Havens?

Market psychology was tested when the two most important safe haven assets, gold and US Treasury bonds, were dissonant with the geopolitical alarm, actually losing investors money following the escalation.

It begs the following question: how do traditional safe havens fall during a war?

The answer lies in the macro data operating beneath the headlines.

The regular Institute of Supply Managers (ISM) survey offered alarming signs of inflationary overheating, with the number of respondents complaining of higher prices leaping to its highest since 2022.

This was driven largely by tariffs

Respondents noted that Section 232 tariff policyis raising prices while lowering demand and profitability, making American-produced commodities like steel and aluminum the highest-priced in the world.

Here I want to take readers back to a post I shared in December 2024 – less than one month after Trump was elected. 

Below is a snippet from that post: 

The imposition of tariffs to foster or protect domestic industries appears logical at first glance.

And I understand why these policies get such widespread support.

By making foreign goods costlier, domestic production becomes viable, creating jobs and boosting specific (protected) sectors.

You might argue that this was one of the key pillars to Trump"s election win; i.e., restoring (manufacturing) jobs to the U.S.

However, this analysis overlooks the crucial reality of opportunity cost and resource allocation.

Again, this is a study of the unseen.

The added cost (e.g., the incremental $5 for a sweater) to consumers reduces their disposable income, curbing their spending across other sectors.

While jobs are created in the protected industry, equivalent jobs are lost elsewhere due to decreased consumer spending. Put another way, the consumer now has $5 less to spend. 

Now with 70% of the US GDP a function of consumer spending — this represents a real threat (arguably not something being pricing in).

From mine, a particularly damaging aspect of protectionism is the visibility of benefits versus the invisibility of costs.

For example, a factory"s operation is tangible and noticeable.

The narrative will always be "look at all the new jobs and factories we have created on-shore. These did not exist before"

It"s very easy to understand why that garners immediate support and enthusiasm.

However, the economic contraction spread across numerous other industries due to higher prices often goes unnoticed.

This takes a lot longer to unfold.

Consequently, the illusion persists that tariffs generate economic gains without drawbacks when, in reality, they stifle innovation and suppress real wage growth by forcing economies to operate inefficiently.

This is what we are seeing… 

Given the ISM (near-term) surge – the chances of rate cuts diminish, and with them the case for buying bonds.

Investors are slowly realizing there is more risk of a pickup in inflation—a natural result of an oil price spike—than they had thought, prompting a rise in the premium they demand to hold bonds for the long term.

Meanwhile, the most traditional safe haven of all, the US dollar, had its best day in eight months during the week, bringing it above its 200-day moving average for only the third time since Liberation Day nearly a year ago.

For example, looking at the strong positive divergence below (i.e., our RSI (lower window) is making new highs against flat to negative price action) – I think we could see further (near-term) upside in "King Dollar"…

Putting it All Together

While history dictates that these selloffs look like buying opportunities, it is far from free money.

For the immediate future, markets will try to adjust the risk premium on equities, meaning it should be higher.

Investors stepping in to buy must hope to becompensated for that risk, recognizing that while their chances are good, they are far from 100%.

Beyond that – surviving a geopolitical crisis requires stripping away emotion and focusing on structural realities.

As conflicts unfold, disciplined investors must ignore the noise and ask three vital, reason-respecting questions:
 

1. Is this a temporary shock or a permanent destroyer of capital? For example, we know that unless an event completely closes markets or triggers a catastrophic global war, history overwhelmingly favors the optimists. Shocks are typically brief and create opportunities to buy assets at a discount.
2. How will this alter inflation and the cost of capital? The most insidious threat isn"t the conflict itself, but its second-order effect on inflation. If rising oil and commodity prices derail the Federal Reserve"s planned rate cuts and send Treasury yields higher, markets must broadly adjust the risk premium demanded to hold equities.
3. Does this fundamentally impair the stocks that I own? Geography and business quality dictate resilience. While US assets currently enjoy a geographical and energy-independent moat, emerging markets face a double-edged sword depending on their dollar exposure and reliance on imported oil.

Discipline—not panic—is the only reliable geopolitical hedge.

Demand a margin of safety and let the fundamentals (such as strong balance sheets, free cash flow, strong returns on capital) guide your capital allocation.

Regards
Adrian Tout