Iran war shockwaves continue to reverberate: Are advisors shifting portfolios?

With the conflict between the U.S., Israel, and Iran now in its sixth day, advisors and their clients have had to contend with a jolt to the markets as geopolitical tensions rise. But the shockwaves from the war have not prompted them to shift portfolios.

“I think what's happened over time is that advisors have become less reactionary and tried to be more proactive in terms of how they're building and managing portfolios,” Chris Maxey, chief market strategist at Wealthspire, told InvestmentNews. “They're trying to build a portfolio that is designed to accommodate these events.”

“And as you look over the last 15 years, clients have navigated quite a few of these events,” he added. “At least at the onset, people are being very careful about overreacting … the risk you have is that the longer this goes on, the higher the likelihood that the market sentiment changes.”

The VIX volatility index, which has been dubbed Wall Street's "fear gauge," climbed to a three-month high Tuesday amid a broader market selloff. The index ended Wednesday's session down 10.3%, but is up more than 18% Thursday.

Wealthspire’s comments echo those from Tash Elwyn, president of Raymond James’s private client group. This week Elwyn told InvestmentNews that he has had conversations with advisors who have told him that their clients are “steady” through the recent events.

Maxey also notes that broader economic climate remains positive, boosted by factors such as a healthy consumer environment, containment of layoffs, and tax refunds returning to household over the coming months, potentially fueling spending. “You have the benefit of all those things happening for the economic and the fundamental picture,” said Maxey. “But what you always need to be careful of are the impacts on margin.”

LESSONS OF THE 2008 FINANCIAL CRISIS AND COVID

However, Maxey says that, right now, the fundamental picture remains strong. As for the way advisors approach their portfolios, the Wealthspire market strategist thinks the financial crash of 2008 prompted the industry to sharpen its focus on resilience around major events, as did the Covid-19 pandemic.

Other experts have placed the fallout from the Iran war within a historical context. LPL Financial Portfolio Strategist George Smith says that market reactions to major events are sometimes sharp, but often short-lived. Across more than two dozen major geopolitical events since World War II, the S&P 500 has produced an average one-day decline of just -1%, he explained, in a note Wednesday.

“In other words, even seemingly dramatic world events tend to trigger declines that are notable, but not catastrophic,” he wrote. “Typically, markets tend to absorb shocks quickly, stabilize (bottoming on average within 18 days), and recover within a matter of weeks (the average time taken for the S&P 500 to get back to pre-event levels is under 39 days).” LPL Financial surveyed a wide list of historical events, encompassing Pearl Harbor, the Cuban Missile Crisis, the 1987 stock market crash to 9/11, as well Brexit and the Russia–Ukraine conflicts. The financial advice company found that stocks have repeatedly demonstrated resilience.

The Iran conflict sparked a selloff in stocks earlier this week with the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite all falling in the wake of the conflict. The Dow Jones Industrial Average is down more than 2% Thursday, while the S&P 500 is off 1% and the Nasdaq Composite is down more than 1%.