How War in the Middle East Affects the Stock Market— and Your Wallet

Speaker 1 Here's one piece of advice that I've given for years: build an emergency fund. Aim to stash away enough to cover at least three months of expenses in case your income suddenly drops.

Speaker 1 Sounds simple, right? But let's be honest, it's not. Saving even one month's worth of living costs can feel impossible.

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Speaker 1 Here's one piece of advice that I've given for years: build an emergency fund. Aim to stash away enough to cover at least three months of expenses in case your income suddenly drops.

Speaker 1 Sounds simple, right? But let's be honest, it's not. Saving even one month's worth of living costs can feel impossible.

Speaker 1 Just when you're making progress, that check engine light blinks on and derails your plans. Life already throws enough curveballs.
You don't need your bank adding to the chaos.

Speaker 1 That's why it's so important to choose one that makes savings easy and doesn't nibble away at your hard-earned money with ridiculous fees. QIIME understands that every dollar counts.

Speaker 1 That's why when you set up direct deposit through QIIME, you get access to fee-free features like free overdraft coverage, getting paid up to two days early with direct deposit, and more.

Speaker 1 With qualifying direct deposits, you're eligible for free overdraft up to $200 on debit card purchases and cash withdrawals. To date, QIIME has spotted members over $30 billion.

Speaker 1 Work on your financial goals through QIIME today. Open an account in just two minutes at chime.com slash MNN.
That's chime.com slash MNN. Chime feels like progress.

Speaker 2 Chime is a financial technology company, not a bank. Banking services and debit card provided by the Bank Corporation Bank NA or Stripe Bank NA, members of FDIC.

Speaker 2 Spot me eligibility requirements and overdraft limits apply. Timing depends on submission of payment file.
Fees apply at Out of Network ATMs, bank ranking, and number of ATMs, according to U.S.

Speaker 2 News and World Report 2023. Chime, checking account required.

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Speaker 4 I'm Nicole Lapin, the only financial expert you don't need a dictionary to understand.

Speaker 5 It's time for some money rehab.

Speaker 3 Now, we don't normally do a midday episode of Money Rehab, but I wanted to jump in and tape something for you in real time as we watch the intense escalation going on in the Middle East.

Speaker 3 When there is a conflict in that part of the world, not only are there geopolitical implications, but there are also big economic implications.

Speaker 3 Like if you checked your portfolio today, you might have wished you didn't.

Speaker 3 Whenever there's conflict in the region, you can expect to see changes in oil prices, stock market swings, and economic uncertainty.

Speaker 3 So today, I'm going to explain all of that and what history tells us will happen next. But first, I want to recap for you what happened yesterday from our friends at Monuz.

Speaker 5 Okay, let's start in the Middle East where the Israeli military launched massive preemptive strikes against Iran overnight local time, targeting the country's nuclear program, including multiple strikes on Iranian nuclear sites, dozens of military targets, and targeted assassinations of Iran's nuclear scientists.

Speaker 5 Israel calls it necessary for its self-defense. It is a dramatic escalation that increases the chances of an all-out war between Israel and Iran.

Speaker 5 Israel has declared a state of emergency and is expecting that Iran will retaliate.

Speaker 5 Israel's defense minister, Israel Katz, saying the country is expecting a missile and drone attack against the state of Israel and its civilian population in the immediate future.

Speaker 5 It all comes as the Trump administration had been in talks with Tehran on a possible nuclear deal.

Speaker 5 President Trump himself had recently said he told Israeli Prime Minister Benjamin Netanyahu not to launch a military strike while the talks were ongoing. U.S.

Speaker 5 Mideast envoy Steve Witkoff was supposed to meet for a sixth round of talks with Iran on Sunday. It is unclear if that is still going to happen.
Most analysts say it is unlikely at this point.

Speaker 5 Now, in response to the overnight Israeli strikes, the Trump administration appearing to distance itself from Israel's decision to strike. U.S.

Speaker 5 Secretary of State Marco Rubio saying in a statement, quote, we are not involved in strikes against Iran, and our top priority is protecting American forces in the region.

Speaker 5 He said, President Trump Trump and the administration have taken all necessary steps to protect our forces and remain in close contact with our regional partners.

Speaker 5 Let me be clear, Iran should not target U.S. interests or personnel.
The U.S., not involved in the strikes, but Israel did let the U.S. know that they were coming.

Speaker 5 Rubio said, quote, Israel advised us that they believed this action was necessary for its self-defense.

Speaker 5 In his first comments, since Israel struck Iran, Israeli Prime Minister Benjamin Netanyahu said in a video statement that Israel had attacked Iran's main nuclear enrichment facility in Netanz and Iran's leading nuclear scientists.

Speaker 5 He also said Israel struck at Iran's ballistic missile program. Take a listen.

Speaker 6 This operation will continue for as many days as it takes to remove this threat. For decades, the tyrants of Tehran have brazenly, openly, called for Israel's destruction.

Speaker 6 They've backed up their genocidal rhetoric with a program to develop nuclear weapons.

Speaker 5 He accused Iran of advancing its nuclear program, calling it a clear and present danger to Israel's very survival.

Speaker 5 Earlier this week, the Board of Governors of the International Atomic Energy Agency, which is the United Nations nuclear watchdog, formally found that Iran was not complying with its nuclear obligations.

Speaker 5 That's for the first time in 20 years.

Speaker 5 In response, Iran said that it would launch a new enrichment center in a secure location and replace the first-generation machines at another site with more modern equipment.

Speaker 5 Hours after that, this attack from Israel, the Islamic Republic of Iran, state media saying that its top commander of the IRGC or the Islamic Revolutionary Guard Corps, Hossein Salami, was targeted in the Israeli airstrikes and is dead.

Speaker 5 Iran's Revolutionary Guard controls Iran's arsenal of ballistic missiles.

Speaker 5 Now, in addition to Sulami, Israel believes the chief of Iran's military, Mohammed Bogheri, other members of the military's top brass and senior nuclear scientists were all killed in the strikes.

Speaker 5 Israel attacked at least six military bases around Tehran, residential homes at two highly secure complexes for military commanders, and multiple residential buildings around Tehran.

Speaker 5 So this is all where things stand as a very late Thursday evening. Definitely check the Mo News Instagram page at Moshe, M-O-S-H-E-H, throughout the day for more developments.

Speaker 3 That's Jill Wagner, co-host of Mo News on today's episode of The Pod. You can listen to the entire thing if you click on the link in the show notes.
So that's what happened last night.

Speaker 3 And today, the market reacted. At the time I'm recording this, the Dow has fallen about 2% and the SP 500 is down about 1%.

Speaker 3 I'll decode that for a second. The Dow and the SP 500 are two collections of stocks that investors tend to use to give a pulse check of what's going on with the market as a whole.

Speaker 3 So when the Dow and the SP 500 are down, it is fair to say that the market is down. Events specifically in the Middle East tend to influence the U.S.

Speaker 3 stock market so dramatically because the region is critical for global energy stocks. The Middle East holds more than half of the world's proven oil reserves.

Speaker 3 Countries like Saudi Arabia, Iran, Iraq, the United Arab Emirates, and Kuwait all play major roles in supplying the oil that fuels industries, transportation, and therefore the global financial financial system.

Speaker 3 So even though the geopolitics in the region are complicated, the impact on oil is simple. It just comes down to supply and demand.

Speaker 3 If there's a conflict in the region, investors anticipate access to oil will go down, which makes the price of oil go up and all other industries that depend on oil more expensive.

Speaker 3 So when there's political instability, military conflict, or even just threats of violence in the Middle East, oil markets react first and fast.

Speaker 3 Even if actual oil production or exports haven't changed at all, the fear that they might be disrupted is enough to send prices soaring. It's not just about what's happening on the ground.

Speaker 3 It's about what could happen next. That's one of the reasons that the stock market is so complicated.
Nobody can predict the future, but that does not stop investors from trying.

Speaker 3 And that can have a self-fulfilling prophecy on the price of stocks. And this is exactly what's happening right now.
Prices of Brent crude oil, the international benchmark for oil, jumped 7% today.

Speaker 3 And that's especially dramatic in the context of the overall market being down. At the time I'm recording this, Iran has retaliated, but the extent of that damage is not yet known.

Speaker 3 An Israeli military official told the New York Times that at least seven sites were hit in Tel Aviv. Iranian officials are saying they struck dozens of targets in Israel.

Speaker 3 But it is also possible that Iran will retaliate economically as well. There is a historical precedent for this.

Speaker 3 In 1973, during the Yom Kippur War, a group of Arab oil-producing countries imposed an embargo on nations that supported Israel, including the United States.

Speaker 3 As a result, oil prices quadrupled in just a few months, and that caused inflation to spike. As you might know, the U.S.
economy then went into a recession.

Speaker 3 The SP 500 fell nearly 50% from 1973 to 1974. And that wasn't just about oil, but oil was definitely the spark.
Remember, the patterns of volatility in oil prices reflect a truism in investing.

Speaker 3 Markets hate, hate, hate uncertainty more than they hate bad news. Stay with me, this pattern played out in August of 1990 when Iran invaded Kuwait.

Speaker 3 Oil prices doubled within days, spiking from around 15 bucks to over 40 bucks a barrel. The stock market didn't love it.
The SP 500 dropped about 16% from July to October.

Speaker 3 But here's the really interesting part. When the U.S.-led coalition launched Operation Desert Storm in January of 1991, the markets realized that the conflict would likely be short and stocks rallied.

Speaker 3 By February, the market made back most of its losses. Again, markets hate uncertainty more than they hate bad news.
Once the path becomes clear, even if the path includes war, markets often stabilize.

Speaker 3 Again, it is a pattern, not a one-off. When Iraq was invaded in 2003, oil prices again rose sharply.
But just like in 1991, once the war actually began and the U.S.

Speaker 3 military quickly seized control of Baghdad, oil prices came down and stocks rebounded. Between March of 2002 and the end of that year, the SP 500 gained over 26%.

Speaker 3 So despite the geopolitical tension, the market performed really well for the same reason we see emerge in these kinds of conflicts. Reduced uncertainty is great for the markets.

Speaker 3 So here's how you can take these historical patterns and and factor them into your own financial world right now.

Speaker 3 If you're a new investor, every instinct in your body is going to tell you to pull your money out of the market. Please, please do not do that.
I get it. I absolutely get it.
War is scary.

Speaker 3 And of course it shakes investor confidence. And so when fear takes over, people sell, especially newbie retail investors.
That creates short-term volatility. But here's the key.

Speaker 3 Most professionals do not panic. Instead, they look for buying opportunities.
This reminds me of a famous Warren Buffettism: be fearful when others are greedy and greedy when others are fearful.

Speaker 3 And he is right, as usual. When the market drops because of fear, not fundamental issues with U.S.
companies or the economy, that's often when long-term investors lean in.

Speaker 3 Since World War II, the SP 500 has typically been higher just six months after a major geopolitical shock. Not every time, but most of the time.
And over a 12-month period, even more so.

Speaker 3 So even though markets price in bad news quickly, they have short memories. And so if you're a long-term investor, you should hang in until all of this is in your rear view.
So do stay invested.

Speaker 3 And to get more granular, do review your energy exposure and do keep an eye out for defense stocks. Energy stocks often benefit from higher oil prices.

Speaker 3 So if you're underweight in that sector, once there's more more resolution in the region and prices stabilize, you might want to consider buying some energy stocks so that you can benefit from the volatility.

Speaker 3 Of course, investing in oil might not be your political jam, and that is A-ok.

Speaker 3 But if you're bullish, to be clear, I am not saying that you should go all in on oil stocks every time there's a headline, but it is worth understanding how much your portfolio is correlated to energy prices.

Speaker 3 ETFs like XLE, that's the energy sector spider fund, are one great way to get broad exposure to energy without trying to pick individual winners.

Speaker 3 Now, if all of that sounds like gibberish to you, I have linked an episode in the show notes that I did explaining what the heck an ETF is and how it's a useful starting point for new investors.

Speaker 3 For defense stocks, contractors like Lockheed Martin and Northrop Grubman often outperform during times of military conflict.

Speaker 3 Again, politically and ethically, this might not be the industry that you want to support, and I get that.

Speaker 3 But if you do want to hedge your portfolio during geopolitical tensions, adding a small slice of defense exposure could be worth considering. That's what the pros do.

Speaker 3 Here's what they don't do: they do not panic. Fear-based selling locks in losses always.

Speaker 3 If you sell during a market dip, you miss the recovery. And if you're out of the market when that rebound happens, you're likely to underperform for years.

Speaker 3 JP Morgan found that missing just the 10 best days in the market market over a 20-year span could cut your returns in half. And guess when those best days usually happen?

Speaker 3 Right after the worst ones.

Speaker 3 So here is the bottom line. It is emotionally hard to stay on course when the world feels like it's on fire.
Trust me, I get it.

Speaker 3 But over and over again, history shows us that markets do recover and that staying disciplined, not reactive, is what wins over time.

Speaker 3 So keep calm. Do not chase the oil rally.
Do not dump your stocks out of fear. Zoom out.

Speaker 3 Take a breath. And remember, this too shall pass.

Speaker 3 For today's tip, you can take straight to the bank.

Speaker 3 If you're against investing in oil or defense stocks, there are other industries that tend to outperform the market during times of conflict in the Middle East.

Speaker 3 Gold, for example, is the classic flight to safety asset. During the Gulf War 1990 and the Iraq invasion 2003, gold prices surged along with investor demand for safety.

Speaker 3 And it's not just gold itself that rises in value, but mining stocks that outperform the market too.

Speaker 3 Gold miners like Newmont, ticker symbol NEM, or Barrack Gold, ticker symbol G-O-L-D, often perform even the price of gold itself because of leverage to rise in commodity prices.

Speaker 3 Plus, gold is also a hedge against inflation. And since conflict-driven oil spikes can often stoke inflation, gold tends to benefit on two fronts, from panic and from macro fundamentals.

Speaker 3 So if you're looking for an ETF, check out GLD that tracks the price of gold or GDX, which is a gold miner's ETF.

Speaker 4 Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin.
Money Rehab's executive producer is Morgan Morgan Lavoie. Our researcher is Emily Holmes.
Do you need some Money Rehab?

Speaker 4 And let's be honest, we all do.

Speaker 4 So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me.

Speaker 4 And follow us on Instagram at MoneyNews and TikTok at Money News Network for exclusive video content. And lastly, thank you.

Speaker 3 No, seriously, thank you.

Speaker 4 Thank you for listening and for investing in yourself, which is the most important investment you can make.