How to Trade War

Iran War Shakes Markets: The Biggest Enemy for Investors Might Not Be Geopolitical Risks Themselves, but the “Miracle Cures” Sold by the Financial Industry and the Impulse to Chase Overheated Assets

As the US-Iran conflict continues to escalate and its outlook remains unpredictable, traditional “safe-haven and benefiting” assets such as U.S. defense stocks, energy, and gold have surged significantly, with valuations generally at historic highs. Meanwhile, the financial industry is accelerating the launch of various themed products claiming to help investors hedge against war and inflation risks or profit from them.

The Wall Street Journal quotes experts warning that market prices have largely priced in obvious war logic, and the cost of chasing popular assets is far higher than before the conflict. At the same time, the course of the war itself is so uncertain that even the governments involved are struggling to grasp it, making any major investment decisions based on geopolitical forecasts highly risky.

In the current environment, investors should defend themselves in two directions—guard against bad news from potential war and also be cautious of investment opportunities promoted by the financial industry.

War Sparks Investment Hype, Financial Industry Capitalizes on the Trend

Once a war begins, investors often become the main targets of aggressive financial marketing. Various products are packaged as “insurance” against war and inflation or as “weapons” to profit from them—funds, specific assets, sector ETFs, AI-driven investment advice, proprietary trading signals, and algorithms emerge, often accompanied by hefty fees.

These marketing narratives have their internal logic: war requires weapons, oil supplies are constrained, panic and uncertainty boost gold demand. These observations are so straightforward that they are almost undeniable. However, the market has already fully priced in the obvious parts.

Mark Higgins, an institutional investment advisor at Irvine, California, and author of Investing in American Financial History, offers a sharp retort: “If even the government doesn’t know what will happen next, why should you?” This question is enough to end any persuasion based on geopolitical predictions that encourages aggressive actions.

High Valuations of Popular Assets, Cost of Protection Has Significantly Increased

A large amount of capital has already been deployed, leaving little margin of safety for latecomers.

According to FactSet data, major defense aerospace stocks like Lockheed Martin, Northrop Grumman, and L3Harris Technologies have all gained over 24% this year. The P/E ratio of the iShares U.S. Aerospace & Defense ETF components has reached 41.5 times earnings over the past 12 months, over 50% above the overall market, with many stocks approaching historic highs.

In the energy sector, crude oil prices have risen 67% year-to-date. FactSet reports that energy sector ETFs have attracted over $7 billion in new funds this year, with $2.3 billion flowing in just since early March. The P/E ratio of the holdings in the Dreyfus Energy Select Sector ETF has climbed from 8-10 times in 2022-2023 to 22.4 times this week.

Gold has gained 51% over the past year, and despite a 12% pullback this month, it remains near historic highs. The retreat in gold prices may indicate that “panic trading” is easing—since the war began on March 2, defense and aerospace ETFs have declined at least 5%.

As the market saying goes: “There are no umbrellas when the sun is shining,” and seeking shelter now will come at a high cost.

Unpredictable War, High Risks in Geopolitical Betting

The course of this war has repeatedly exceeded expectations. The White House initially predicted a quick collapse of the Iranian government through “short-term actions,” but the conflict has now lasted weeks. The current situation is vastly different from early assessments.

In such an environment of extreme uncertainty, making major asset allocation decisions based on anyone’s geopolitical predictions is essentially a gamble with questionable odds. Even the US, Iran, and involved governments have been caught off guard by sudden turns in the conflict multiple times.

Historical patterns also warrant caution: unexpected events and negative news often prompt investors to hurriedly switch strategies—quick trading, timing the market, chasing high dividends… These tactics claim to reduce risk or boost returns, but in highly uncertain markets, the costs of aggressive moves often outweigh the benefits.

Inflation Hedging Is Supported by Evidence, But Major Reversals Should Be Avoided

If concerns about war driving inflation, consider US Treasury inflation-protected securities instead of blindly chasing soaring commodities.

Series I Savings Bonds issued by the US Treasury currently yield 4.03%. The semiannual rate will reset on April 30, but they can only be purchased directly through the Treasury’s official website.

Treasury Inflation-Protected Securities (TIPS) can be bought directly from the government, through brokerage accounts, or packaged into mutual funds and ETFs. They still offer a real return about 1-2% above official inflation rates.

A competent financial advisor at this moment should advise clients against aggressive moves. Selling loss-making assets to hedge taxable gains may be reasonable, but making large portfolio shifts in response to fears that may never materialize is unwise.

Mark Higgins recommends investors avoid major, hasty portfolio adjustments. Regardless of how the conflict unfolds, any operation that is difficult to reverse at low cost should be off-limits.

Risk Warning and Disclaimer

Market risks are inherent; invest cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should evaluate whether any opinions, viewpoints, or conclusions herein are suitable for their circumstances. Responsibility for investment decisions rests solely with the reader.