Market volatility triggered by the Iran conflict suggests that investors' primary adversary may not be geopolitical risk itself, but rather the array of "quick-fix" solutions marketed by the financial industry and the impulse to chase assets that have already surged.
As the U.S.-Iran conflict continues to unfold with unpredictable outcomes, traditional "safe-haven and beneficiary" assets such as U.S. defense, energy, and gold stocks have experienced significant gains, with valuations generally reaching historical highs. Concurrently, the financial sector is accelerating the rollout of thematic products, claiming they can help investors hedge against war and inflation risks or profit from them.
Citing industry experts, The Wall Street Journal warns that current market prices have largely priced in the obvious war-related trends, making the cost of entering popular assets substantially higher than before the conflict began. Furthermore, the course of the war remains difficult even for the involved governments to predict, meaning any major investment decisions based on geopolitical forecasts carry substantial risks.
In the current climate, investors should guard against two potential threats: the adverse impacts of the war itself, and the investment opportunities aggressively promoted by financial firms.
**War Sparks Investment Hype and Financial Marketing**
Once conflict erupts, investors often become targets of intensive financial marketing. Various products are packaged as "insurance" against war and inflation or as "tools" to profit from them—including specialized funds, targeted assets, sector ETFs, AI-driven investment advice, and proprietary trading signals and algorithms, typically accompanied by significant fees.
These marketing narratives have an inherent logic: war requires military equipment, oil supplies face disruption, and fear and uncertainty drive demand for gold. These observations seem almost indisputable on the surface. However, markets have already fully priced in these obvious factors.
Mark Higgins, an investment advisor at IFA Institutional in Irvine, California, and author of "Investing in U.S. Financial History," offers a compelling rebuttal: "When governments themselves don’t know what will happen next, how can anyone else?" This question effectively counters any argument urging aggressive action based on geopolitical predictions.
**Elevated Valuations in Popular Assets Increase Protection Costs**
Substantial capital has already been deployed, leaving little safety margin for latecomers.
According to FactSet, major defense and aerospace stocks like Lockheed Martin, Northrop Grumman, and L3Harris Technologies have each risen more than 24% year-to-date. The iShares U.S. Aerospace & Defense ETF currently trades at a trailing price-to-earnings ratio of 41.5, a more than 50% premium to the broader stock market, with many individual stocks nearing historical valuation peaks.
In the energy sector, crude oil prices have climbed 67% this year. FactSet data shows energy sector ETFs have attracted over $7 billion in new inflows, with $2.3 billion entering since early March alone. The State Street Energy Select Sector ETF's P/E ratio has risen from a range of 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, remains near record highs. The retreat in gold may indicate a partial unwinding of "fear trades"—since the conflict began on March 2, defense and aerospace ETFs have declined by at least 5%.
As the market adage goes: if you didn’t buy an umbrella when the sun was shining, seeking shelter now will come at a steep price.
**Unpredictable Conflict Dynamics Make Geopolitical Bets Highly Risky**
The trajectory of this war has repeatedly defied expectations. What the White House initially anticipated as a swift operation to dismantle the Iranian government has stretched into weeks, with the current conflict situation differing significantly from early assessments.
In such a highly uncertain environment, making major asset allocation changes based on anyone’s geopolitical predictions is essentially a gamble with questionable odds. Even the U.S., Iranian, and related governments have been caught off guard by sudden turns in the conflict.
Historical patterns also offer a cautionary lesson: sudden events and negative news often tempt investors into hastily adopting entirely different strategies—such as rapid trading, market timing, or chasing ultra-high dividends. While these approaches claim to reduce risk or enhance returns, in highly uncertain markets, aggressive moves often come at a cost far greater than any potential benefit.
**Inflation Hedging Has Merit, but Avoid Hard-to-Reverse Moves**
For those concerned that war could fuel inflation, considering U.S. Treasury inflation-protected instruments may be wiser than blindly chasing already inflated commodity assets.
Series I Savings Bonds, issued by the U.S. Treasury, currently offer a 4.03% yield. This semi-annual rate will reset on April 30, but these bonds can only be purchased directly through the Treasury’s website.
Treasury Inflation-Protected Securities (TIPS) can be acquired directly from the government, via brokerage accounts, or through mutual funds and ETFs. They currently provide a real return of about 1% to 2% above the official inflation rate.
A competent financial advisor should currently be discouraging clients from taking drastic actions rather than encouraging them. Selling loss-making assets to offset taxable gains may be reasonable, but significantly reallocating a portfolio based on fears that may never materialize could prove counterproductive.
Mark Higgins advises investors to avoid major, hasty portfolio adjustments. Regardless of how the conflict evolves, any move that cannot be easily reversed at low cost should be considered off-limits.