Friends and Clients - the following commentary is derived from an advisory sent to me this morning by one of our money managers whom I have referenced frequently over the years, Richard Bernstein (RBA). Webster Investment Advisors, like RBA, is not an event-driven firm, but war is an extremely serious event, and I felt a comment to our clients seemed necessary. Accordingly, here are several quick thoughts on the recent events. These thoughts on financial markets and portfolio positioning are consistent with those I have been sharing recently with you regarding broad allocations across most of our portfolios.
As with prior conflicts, both domestic and abroad, it seems critically important for investors to think like investors and to ignore the political banter.
War is rarely, if ever, disinflationary or deflationary because resources are typically diverted to the war effort and away from productive economic use. Of course, the duration of a war factors heavily into this point because a shorter war could result in only transitory inflation.
The Vietnam War contributed to the inflationary spiral of the 1960s and 1970s. It was not the sole source of inflation, but the combination of increased defense spending and increased non-defense government spending was a definite contributor. Investors might see a similar combination again in 2026 because the recent fiscal stimulus bill will largely take effect this year.
Given the US’s massive trade deficit and contracting global trade, investors should consider whether there will be supply-chain disruptions beyond the obvious disruptions in oil and gas. Air and shipping routes have already been altered. Importantly, the US did not have a massive trade deficit during the 1960s and 1970s.
It is unlikely that an Iran war will turn out to be as long or as large as was the Vietnam War, but the US does seem to be on a path of a series of smaller wars. Investors should consider whether the series of smaller wars could additively contribute to inflation.
The earlier Middle East wars were not inflationary because they occurred during a period of expanding globalization and increased economic competition. The reverse is happening today.
Commodity-related inflation related to the war might further handcuff the Fed’s ability to cut interest rates. The nominal economy (i.e., real growth plus inflation) was already close to a 20-year high when excluding the immediate post-pandemic period, and many leading indicators of inflation have been warming.
Our equity portfolios remain overweight value vs. growth (i.e., shorter-duration equities) and non-US stocks, and we continue to avoid speculative areas of the market that are more dependent on liquidity and speculation.
Our fixed-income portfolios remain focused on higher-quality corporates, mortgages, and treasuries, but we maintain a shorter-than-benchmark duration due to the inflation risks cited above.
Gold, managed futures, and flexible fixed-income continue to be our “spare tires” in the portfolio. Gold has historically had a meaningful positive correlation to uncertainty, and war increases uncertainty.
- In turn, uncertainty creates both volatility and opportunity. We feel we are positioned for both.
I have intentionally focused here on matters of investment significance. Please know my heartfelt feelings are over the loss of human life and the trauma to so many millions of people. Long-term, I am conscious of and intrigued by the fact that what we are experiencing, culturally, financially, technologically, and structurally, both abroad and at home, is creating a sea change in our global future.
James and I assure you that we will continue to monitor both the news and the markets and, as always, will be in touch if we have information or recommendations that we feel would be helpful to you. These can be disconcerting times. Please let us know if you would care to discuss further.
In parting, thank you for your relationship with us, and God Bless America. Bob Webster and James Keller