Since President Donald Trump declared “Independence Day” last April, investors have been concerned about his tariff plans – they believe that higher tariffs will fuel inflation, disrupt supply chains, and lower corporate profits.
These concerns are understandable. Tariffs raise the cost of importing raw materials, which invites retaliation from trading partners — a risk to global economic growth. However, these concerns have been dramatically exaggerated.
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From Independence Day (April 2, 2025), the S&P 500(SNPINDEX: ^GSPC), Nasdaq Composite(NASDAQINDEX: ^IXIC)and Dow Jones industrial average(DJINDICES: ^DJI)rose 12%, 19%, and 7%, respectively.
^SPX data via YCharts
These returns suggest that investors have already bought prices at low levels. While Trump’s tariff announcement is good for clickbait, it’s ultimately a manageable policy risk. A true portfolio shaker event is taking place halfway around the world as the US wages its war against Iran.
While investors continue to put interest rates under the microscope, they are overlooking a bigger threat: Rapid growth in Iran. What started as a proxy conflict over the summer has now turned into a confrontation with Iran’s military forces.
Perhaps the most powerful forces of conflict affect important shipping lanes and energy infrastructure. In particular, the Strait of Hormuz — which handles about 20% of the world’s oil flow — has become a major point. The ongoing disruption at the port has sent crude oil prices soaring.
Although power producers will see less money in the future, the broader market will have the opposite. The airline, trucking, and freight businesses are now looking at the fuel price explosion causing profits. Producers who rely on chemicals, plastics and metals are watching their input costs rise by the day. Additionally, the retail sector must absorb these higher transportation costs and ultimately pass them on to consumers, fueling inflation and recessionary reports.
Image source: White House photo by Daniel Torok.
When it comes to the stock market, investors hate volatility more than anything else. That said, wars don’t affect all brands equally once. Instead, geopolitics is gradually changing the risk profile as the situation progresses.
As a result, investors generally sell stocks first and ask questions later, resulting in high levels of volatility and severed correlations among asset classes. As capital moves from stocks to safe havens such as Treasurys or gold, central banks must navigate a difficult path because inflation from energy sources collides with the need to support economic growth. This often means maintaining high interest rates for longer than expected.
Historical shares of the Middle East energy conflict have seen declines of 8% to 15% across major indexes, followed by strong rebounds that have rewarded patient investors.
Below are some steps you can take to reduce the risk of an Iran conflict:
Reduce exposure to speculative opportunities and static growth.
Buy energy producers and related fees to prevent inflation.
Create a protective shield with services, health care and consumer staples.
Filling stocks with money will provide the necessary financial conditions to buy the inevitable opportunities that are oversold in value names.
Smart traders understand that in times of uncertainty, the best response is to avoid panic trading. Instead, use geopolitical confusion to deliberately position yourself.
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Adam Spatacco has no position in any of the products mentioned. The Motley Fool has no position in any of the products mentioned. The Motley Fool has a publicity strategy.
Forget the Fees: The Iran War Is the Biggest Threat to Your Portfolio Right Now was originally published by The Motley Fool.
