CAISSA 2026 Iran

Video Transcript

Hello from CAISSA, and an investment update on the Iran energy and your portfolio situation.

What’s happening is the event over the past couple of days, we’ve seen a significant escalation between the U.S, Israel, and Iran. Major airstrikes have weakened Iran’s leadership and military infrastructure, and the removal of Iran’s supreme leader marks a generational turning point, but it also introduces some stability.

The Strait of Hormes has been shuttered, which is a main passageway for many cargo ships. The likely near-term outcome is volatility, regional instability, and energy market sensitivity.

The key economic transmission here channel is oil. Oil prices have moved a bit higher to $77 a barrel. Now, this seems to indicate that markets are currently pricing in a limited conflict, in a relatively short duration. To give you a little bit of comparison, if oil were to move to $90 a barrel, that would resemble more like the April of 2024 insurgence, when markets largely absorbed that spike as tensions resolved pretty quickly.

A more severe comparison might be in early of 2022, after Russia invaded Ukraine, oil moved to about $100 a barrel, and briefly up above about $120 a barrel, and stayed there for a prolonged period. Now, where oil settles here, it will tell us a lot about the situation, but it’s not our role to predict the outcome, it’s our role to assess how is this going to affect portfolios.

So here’s a little bit about the economic backdrop, and I’ll give you the current, before we talk about any of the economic, but currently, as of the time that I’m recording this, the stock market is holding quite steady. Had a little bit of a market decline this morning, but really holding steady, and oil is still trading around that $77 a barrel.

Now, for perspective, let’s talk about where we were going into this event. Real GDP growth a couple years ago was about a little bit over 2%. Unemployment has held near 4%, corporate earnings have been really strong, the economy’s been really steady. Not booming, not busting, but pretty steady. post this conflict, as we look forward to all the things that we now know and understand, which is not a ton more, but we are still thinking that 2% real GDP is gonna be there, inflation might just poke a little bit higher, and unemployment is still gonna be 4% at year-end.

That foundation matters a lot because geopolitical shocks hit differently when the economy is stable versus when the economy is fragile. We are in a very stable economy right now. But let’s talk about the inflation, energy, and how that might impact the U.S. economy. Let’s talk about the oil first. That’s the pressure point. So today, the U.S. is a net exporter of oil. We’re exporting roughly about $275 billion of petroleum products, and we import almost about $200 billion.

So that means we’re running a very nice and meaningful trade surplus in oil. If oil increases, and the prices rise, shareholders and energy producers benefit. For the U.S. economy, in aggregate, that means we make money. But the Main Street, that’s relatively different, because in reality, the average consumer is paying more at the pump. That pressures the middle class, and that basically means that our consumer is going to push inflation at least moderately higher for the time being. It might even bump up to about 3% near June. However… our base case still says that inflation is going to trend down by year-end, and that does not really materially alter our trajectory unless that Strait of Hormuz is closed for an extended period of time. That’s going to create a very, very different scenario.

From a policy perspective, what we think is going on, and what we’re looking at right now, is the Federal Reserve will probably look at this as a pass-through or a look-through for any oil-driven inflation. The, now, they understand that this hits consumers a little bit differently, but it doesn’t really justify any different tightening measures as of yet. fiscal policy, what we could see there is that tariff rebates might be, in the check format, might still come to fruition, even if we don’t get those tariffs that that’s running through some Supreme Court issues.

Increased in defense spending, slightly higher deficits, those could be some of the fiscal policy things that we’re going to be looking at. The net effect of all of that could be slightly more inflation, a little bit more government spending, not really any base case signal for a recession, and corporate profits might even profit from this, depending. So, net impact, I would say here, at this point, is modest.

Now, the thing that we’re looking at, because we have been diversifying international, we’ve been checking in on our international portfolios, because in the U.S. dollar has declined in the last year, and we were expecting it to gradually keep declining a little bit, and getting softer over time, and that really does support our international returns relative to our U.S. investments, hence why we were increasing our international exposure last year and into this year.

That still does improve our translation effect for all of our global earnings, and we’re not seeing that this conflict has contaminated that thought so far. It does not likely reverse the longer-term currency trend, and for our diversified portfolios with international exposure. This does remain constructive, so we’re still constructive on international holdings.

So what does this mean? What high net worth investors should evaluate?

Discipline matters. First off, if you… if you hadn’t been rebalancing in the last several years, and you were at a 60-40 portfolio, and you didn’t rebalance, you’d be something more closely to a 70-30 portfolio. We have been rebalancing, we have been disciplined, we have held to that discipline and been rebalancing and gone international, increased international, and pulled away from growth assets.

Domestically. Because that drift does happen quietly if you’re not maintaining that. And it also, if you don’t do that, increases the risk to shocks like this. So rebalancing is not a reaction to Iran when we rebalance. We are being proactive. It is actually a structural risk management tool that we use.

Secondly, diversification has to be intentional. We have been watching value versus growth, small versus large, U.S. versus international for many years, and we have specifically taken some pretty large steps in the last 12 months to, diversify out of those, those places that we think got a little overheated. Now, when you come to hedging, we don’t hedge one specific geopolitical risk. We build portfolios to be resilient and to have that be resilient to a general rise in uncertainty, whether it’s driven by technology, any sort of concentration, regulation, fiscal shifts, or geopolitical instability. We don’t hedge against one specific risk, we try to hedge against all of them nominally.

Third, we try to avoid speculative concentrations, so the next bear market is always around the corner, we don’t know where it’s going to happen or when it’s going to happen, but we want to be balanced when it happens. We try not to make predictions on that.

So, to wrap up, in closing, our perspective is that geopolitical events always feel very dramatic in the moment, in real time, but history does show that diversified portfolios do absorb those shocks. energy spikes tied to these limited conflicts are often temporary. So, our economic fundamentals matter more than headlines, and you’re going to see a lot of headlines. Already this morning, we have seen headlines such as the dramatic spike in oil hasn’t been that dramatic, or the drop in the stock market, it dropped for a little bit. It wasn’t… it wasn’t significant. So, our base case is remaining the same. We see 2% real growth, 4% unemployment, modest volatility, not a systemic breakdown.

We’re going to remain disciplined, we’re going to remain diversified, and we’re going to lock in long-term allocators.

So, if you have any questions on that, please do hit the button after this, send us your questions, call us, email us, but if you want to review any of your current allocation or look at your portfolio. let us know. Periods like this remind us that process and discipline wins, structure and a discipline allocation always does endure.

Thanks for taking a minute with CAISSA