Current volatility does not equal long-term risk

When the conflict between the United States and Iran escalated the first weekend of March, we chose not to contribute to the noise. In the early stages of geopolitical events, facts are often incomplete, headlines shift quickly and reactive commentary rarely helps investors make better decisions. We chose to wait until we could say something more useful than simply acknowledging that markets were unsettled.

Our central point today is straightforward: Current volatility does not automatically translate into long-term risk though outcomes will depend on how economic conditions evolve.

It’s helpful to look at history here. Around the first Gulf War, the S&P 500 was up 22 percent three months after the start of the conflict and up 21 percent six months later. Around the second Gulf War, it was up 12 percent three months later and 17 percent six months later. Markets were volatile around both episodes, and oil was part of the story then just as it is now. But those periods suggest that Middle East conflicts, by themselves, have not historically been associated with lasting damage to broad U.S. equity markets.

What matters more is whether a geopolitical shock spills into the broader economy. History suggests that financial dislocations tend to leave a deeper and more lasting mark on markets than geopolitics alone. That is why our focus is less on the headline itself and more on the transmission mechanism: oil, inflation expectations, financial conditions and credit.

Source: Strategas

That brings us to energy. The risk is not simply that oil moves higher for a few days. The real risk is that higher energy prices persist long enough to squeeze growth, reaccelerate inflation or push financing costs materially higher. The research we reviewed estimates that every dollar increase in the annual average oil price is equivalent to roughly 8 billion dollars in added spending pressure on the U.S. economy. Past oil shocks have often been followed by higher long-term interest rates over time. While that does not guarantee the same outcome today, it frames what we are watching most closely¹.

We have also heard understandable questions about international stocks. Short-term relative performance has been challenging since this conflict began, but we do not believe that invalidates the case for international diversification. Before the latest selloff, both international developed markets (+32.0 percent; MSCI EAFE index) and emerging markets (+34.3 percent; MSCI EM index) outperformed U.S. large caps (+17.9 percent; S&P 500) for the one-year period from January 1, 2025 through December 31, 2025, even as geopolitical uncertainty abroad was already elevated².

Many of the reasons that supported international stocks heading into this period remain intact. Valuations outside the U.S. are still materially lower. As of February 27, the forward price-to-earnings ratio was 16.5x for the MSCI EAFE index, a broad developed international benchmark, and 13.5x for the MSCI Emerging Market index, a broad emerging market benchmark, versus 21.7x for the S&P 500, a broad U.S. large-cap benchmark. The direction of the dollar also remains important. Safe-haven flows have supported the dollar during this conflict, but a stabilization or reversal there would again be supportive of non-U.S. returns. And continued defense, infrastructure and industrial spending abroad may become more important in a more unsettled world³.

It’s also important to remember that broad international allocations are not a direct bet on Middle Eastern equities. The developed international allocation proxy we reviewed is concentrated in Japan, the United Kingdom, France, Switzerland and Germany. In the emerging markets proxy, Saudi Arabia and the United Arab Emirates together account for about 4.3 percent of the EEM iShares Emerging Markets ETF, which was used as the emerging markets proxy for this analysis (as of December 31, 2025). In other words, broad international exposure is still driven much more by Europe and Asia than by direct exposure to the Middle East⁴.

None of this minimizes the seriousness of the current conflict. It does suggest, however, that short-term volatility and long-term investment impairment are not the same thing.

As always, the best time to reevaluate your risk profile is not in the middle of a crisis. If recent market moves have made you feel that your portfolio carries more risk than you are comfortable with, that’s an important conversation to have with your advisor. But changes to long-term allocation are best made deliberately, with a plan, and from a more stable footing than the middle of a geopolitical shock.

¹ Strategas

² Bloomberg

³ Bloomberg

⁴ Bloomberg, Blackrock

This commentary is provided for informational and educational purposes only. As such, the information contained herein is not intended and should not be construed as individualized advice or recommendation of any kind.  

The opinions and forward-looking statements expressed herein are not guarantees of any future performance and actual results or developments may differ materially from those projected. The information provided herein is believed to be reliable, but we do not guarantee accuracy, timeliness, or completeness. It is provided “as is” without any express or implied warranties.   

Equity securities are subject to price fluctuation and investments made in small and mid-cap companies generally involve a higher degree of risk and volatility than investments in large-cap companies. International securities are generally subject to increased risks, including currency fluctuations and social, economic, and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.    

Fixed-income securities are subject to loss of principal during periods of rising interest rates and are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors before investing. Interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise, and conversely, when interest rates rise, bond prices typically fall.    

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