Stocks Playbook for Geopolitical Tensions (Overreacting is Costly)

While we don’t know the future, at MoneyFlows we’ve learned how overreacting is often costly. So, let’s examine a stocks playbook for geopolitical tensions.

Hasty, Harmful Decisions

In April 2024, Iran attacked Israel. Many wondered if this would lead to further escalation and a broadened war.

Investors worried that an expanded war would have massive economic implications, affecting stocks negatively. But that worry didn’t translate into action – the S&P 500 (SPX) rose 18.6% since.

Hypothetically if you held an ETF that tracked the index, like the SPDR S&P 500 ETF Trust (SPY), and sold out of fear, it would’ve been costly. Heightened emotions can lead to hasty, harmful decisions.

Now let’s look at 35 prior geopolitical events, which include a range of issues. You’ll see how the S&P 500 tends to decline modestly at first, then recovers months later:

This table shows how investors shouldn’t necessarily flee to safety in turbulent times.

Looking specifically at the Middle East, the sample size is small. Still, since 2003 stocks have weathered geopolitical storms there too:

This data again shows how costly it can be as an equities owner to overreact to geopolitical issues. You could miss out on future gains.

Pinpoint Money Flow Trends

To help navigate these scenarios, it pays to examine the Big Money Index (BMI). This proprietary index from MoneyFlows nets Big Money investor activity (all the buys and sells) over 25 trading days to pinpoint money flow trends.

It shows what’s happening with the people and institutions that make markets move. And right now, the BMI is overbought at 82.3%:

Overbought conditions can last for some time. Also, when the BMI eventually falls from overbought, volatility can set in.

Combine that BMI data and context with an extended war and there could be some downward movement. But you’ll see it as it happens in the BMI. If stocks are a bad bet, the BMI will say so.

An Objective Outlook When Tensions Are High

Geopolitical tensions inject uncertainty into nearly all facets of life. For instance, this Iran/Israel conflict could bring increases in energy prices (oil specifically).

Using the United States Oil Fund (USO) and Energy Select Sector SPDR Fund (XLE) as proxies for oil and energy, respectively, there could be increases in those assets and others like them. If tensions drag on, it wouldn’t be surprising to see jumps in both.

No matter what occurs, following Big Money action offers a proven playbook for uncertainty. Tools like the BMI and historical studies provide an objective outlook when tensions are high. This enables better decisions using data.

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