Energy Shock: Perspective for Investors During Global Conflict

In this timely episode of RHP Market Talk, CXO Natalie Picha, and CIO Glenn Royal, CFP® discuss the recent geopolitical tensions involving Iran and what investors should focus on when global events create market volatility. Drawing on historical data and decades of market experience, they explain why reacting emotionally to headlines can often be the biggest risk to long-term investment success.

In this episode:

• What history tells us about markets during geopolitical conflicts and why declines are often short lived.

• The key indicators investors should watch right now, including oil prices, inflation, employment trends, and market volatility.

• Why disciplined, long-term investing matters most during uncertain periods and how a sound financial plan helps investors stay on course.

If you enjoy our podcast, please take a moment to subscribe. We would love it if you would leave us a rating and a review, as it's the best way for us to reach other listeners. We'd also love it if you could share the podcast with your friends and family. You can find us on LinkedIn, Facebook and Instagram for additional content, or reach out through our website at royalharborpartners.com.

Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.

Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.

https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530

Transcript

Natalie Picha 0:10

Welcome back to RHP Market Talk. I'm Natalie Picha, partner and Chief Experience Officer at RHP Wealth Management. Today, I'm joined by our chief investment officer and partner, Glenn Royal, to talk about something that's been dominating global headlines. The recent military conflict involving Iran and the broader geopolitical tensions that have emerged as a result. Whenever geopolitical conflict escalates, markets tend to react quickly. Investors see volatility, rising commodity prices, and a flood of speculation about what can happen next. That uncertainty often leads to emotional reactions in markets as investors try to anticipate the economic consequences of effects that are still unfolding. So today we want to step back from the headlines and talk about what history can teach us, what investors should be paying attention to right now, and why disciplined investing is often the best response during periods of uncertainty. Well Glenn, welcome back to RHP Market Talk. I am looking forward to, not looking forward to this conversation today. I wish this we weren't having to meet today to talk specifically about this Iran conflict, but I know our listeners are probably really leaning into this episode and wanting to hear what you have to say and would love to hear your first thoughts on this conflict.

A Veteran’s View Of Iran

Glenn Royal 2:03

Yeah, well, thank you for having me here as always, Natalie. It's great to see you and I enjoy doing these podcasts with you. And I I do think they're a lot of value for our clients and listeners. This is a little personal for me. I'll just start out saying that I'm a uh U.S. Navy veteran, and I'm a veteran of the uh multinational peacekeeping force in Beirut, Lebanon back in 1983. Some of our listeners may recall, and as you as well, that there was a bombing of the Marine Corps barracks uh in October of 1983, ordered by Iran, uh, who was funding terrorist cells based in Lebanon. It was called the Islamic Jihad. I was part of the response to that Marine Corps bombing where I was with the on the Richmond K. Turner, we were alongside the uh battleship New Jersey, where I watched it launch over 200 rounds of these 16-inch, basically car shell Volkswagens that we launch in retaliation for that. So I've seen a lot of destruction in that area. I paid attention to it. It was say it was called Islamic Jihad, but within uh a year, 1885, they rebranded themselves as Hezbollah. So we know Hezbollah, we know Houtis, we know these all as agents of the Iranian regime. So a lot of this is personal, it's kind of causing some flashbacks at that period. But I'm most surprised that here we are all these years, decades later, and we're still dealing with the same regime, though you know many of the leaders are now dead. It doesn't necessarily make me think the world's a safer place at the moment. Right. So I I still think there are consequences to this. And I just don't see how something could end so quickly. So I'm a little cautious about that.

How Markets React To War

Natalie Picha 3:56

Well, first of all, thank you very much for your service. And um, I know that in times like these, everyone is thinking about, you know, the ultimate sacrifice that our our people in service have to give for us to have, for us to be safe and maintain our freedom. So, you know, to our veterans and to those who have already lost their lives, we're forever grateful for that. So we we we definitely want to recognize that in any conflict, right, the ultimate sacrifice is something that we have to to consider. And while we are while we want to talk about what the the conflict is going to, what kind of impact it's going to have on markets per se, we just remember that there's a toll on human life as well. Yeah. Very sure. So historically, we know that markets are going to be impact by military conflict. I mean, we talk about that quite often, that a lot of what we do at RHP is risk management, and we try to manage as much risk as we possibly can through a lot of fundamental analysis and things like that. But geopolitical risk is something that sometimes we just don't have a crystal ball for. Investors often assume that that military conflict is going to lead to prolonged market declines. But from a historical perspective, how have markets actually performed during periods of military conflict?

Glenn Royal 5:21

Uh great question. And uh to that uh answer, uh Goldman Sachs actually put a pretty good report on this. Ben Snyder over there, one of the uh market strategists. And what he points out is uh since um 1950, there's been seven major geopolitical risk events Korean War, Cuban Missiles crisis, etc. During those periods, the average decline in the first week is 4%. We were down about two last week. Uh now there's a lot of intraday volatility during that period. Uh, but then when we step back and look at what happens in the weeks, the month following the event, typically the markets recover. Okay. So we do think there will be recovery from this event as just as they've always been. I think a lot of it what we're talking about is the ball shot, the volatility that comes in. So when you get those sharp down drafts in those initial days, they're typically followed by sharp updrafts, which we'll probably talk a little bit of why you want to kind of stay the course as an investor because of reasons like that.

Oil Jobs Inflation And Stagflation

Natalie Picha 6:27

Right. The current situation is extremely complex. So it's just simply too early to draw any meaningful conclusions about the long-term economic or or maybe market implications. What indicators are you watching right now and looking at as we're navigating the uncertainty in this situation?

Glenn Royal 6:49

You know, well, uh so higher energy prices are always a drag on on earnings, right? Drag on growth. So what we're watching is oil. Will oil sustain and above a hundred bucks a barrel, will it go back there and hang there? Uh what will the employment lay reports look like? You know, we had a weak employment report just the you know the Friday before this came out.

Natalie Picha 7:14

Right.

Glenn Royal 7:14

You know, so we'll be watching labor uh and also inflation. So whenever I get these high oil prices, the first concern we have is is what we call stagflation. That's lowering of growth, that stagnant economy, and then that inflationary pressures that higher energy prices put out. So I'll be looking for signs of stagflation if they were to occur. Don't really expect it at this point, but that's is what we're going to be watching closely to see if any of those things occur.

Natalie Picha 7:43

Mm-hmm. Well, and I we have to mention, I I know you being a trader for many years of your career, what the energy industry, the traders were going through just these last couple of days, seeing swings, massive swings in oil prices and what that kind of impacts, how that impacts their companies and how that's going to impact the economy, just the the volatility as a whole.

Oil Volatility

Glenn Royal 8:07

Yeah. Um, boy, your your heart goes out to those oil traders right now. Um I'm seeing, I'm sure some are out of business waking up. When you have a 32-point spring swing in one day in the price of oil again this morning, we saw where uh news of a Navy escort, uh Secretary of Energy posted on Twitter, or whatever it is, that he excuse me, I drop my social media guy hacks. Uh but he posted that the U.S. Navy escorted a tanker through, and then he redacted that. Well, oil fell 9% on that news and then quickly recovered it. So if you're a bona fide hedger, bona fide producer, it really messes things up when you have that kind of volatility and energy, particularly uh the users like airline industries, right? They're big consumer, and then the consumer-facing industries down the line that are gonna have to drive this stuff to the store and transport it and all those higher costs, the uncertainties around it. So one of the things we watch for this uncertainty is that VIX gauge, the volatility indicator, right? It's uh the panic fear. So I would kind of, that's another indicator I'd probably watch. Once we kind of get north of 28 on that VIX, those are can become more sustained periods of, you know, just get me out, I can't stand it anymore. That that capitulation phase. Um, not really seeing anything like that right now. Things look look pretty decent. So they're pretty good shape. Um, I do want to and and talk about a little bit about how the individual investor has behaved uh this year uh so far in this event. And uh man, you you gotta hand it to them. They've been right to buy the dips uh for the last several years. So last week in this market sell-off, uh uh Vanguard's uh investor base puts uh invested seven billion dollars into the market. So while the pros are getting all whipped around, uh the retail investor continues to be that steady hand. Why is that? You know, I'll look for long-term returns. I see opportunities like this as a as a when stocks are on sale, the old fully dread apple cell, right?

Retail Investors Keep Buying Dips

Natalie Picha 10:22

Right. So what's interesting about that is we've talked about this in the past, that there's really two operators of the markets, right? Fear and greed. And so right now, what's driving this market? Is it fear or is it greed? And interestingly enough, as far as the retail investor goes, much to your point, you know, they've been rewarded for taking that risk over the last few years, buying those dips. What is that point where the retail investor gets scared, right? And fear takes over because we're seeing this really kind of strange dance go on in this market of are we operating on fear? Are we operating on greed?

Glenn Royal 11:01

And it probably uh even relates to recent military action in Venezuela, where that's a relative short two and a half hour operation or something. You woke up, heard about it. So I think there's some expectations. So I haven't seen fear or greed in this market at the moment, maybe fear amongst institutional investors, oil guys, right? Right. Right. But uh not so much retail. And I I think it's going to take a sustained period of high oil prices that draws down, you know, the the equity market. And once that starts to go and it starts to handle in there for you know a month, two months, three months of negative returns, then I think that concern starts coming in. Uh down, you know, down 10% of correction, down 20% of bear market. You know, that's where that stuff starts to really come in.

Why This Isn’t The 1970s

Natalie Picha 11:52

It starts to really come in. Yeah. What what comparisons do you see to this current situation, to the 1970s oil crisis?

Strategic Reserves And The Jones Act

Glenn Royal 11:59

Oh, so it so it's it's a thing you want to go to, right? OPEC, all the different things, oil, Arab, oil embargo, all that stuff, a White House that was proactive in affairs of the economy and markets. It's very different today simply because the U.S. is now a producer. We're an exporter of energy. Uh, that's the biggest change. And even think about the advent of electric vehicles over the course of the last year, energy efficiency requirements, all because they came born out of those energy crisis of the 70s and the 80s. We put in all these programs of energy efficiency. So we're in pretty good shape. It's kind of like when the tariffs came last April and you had all the disruption. Major corporations had just gone through this with COVID and supply chain redistribution and all that. So they were better able to respond to it. So I think we're better able to respond to this market uh event uh than we were in the 70s. One thing, too, I want to point out, even before this happened, uh, the world was a wash in oil. Remember, we had oil everywhere. Oil was in the 50, 60 bucks a barrel. We saw at the gas pump, right? How cheap gasoline was. Uh so we still had that uh oversupply of oil. And what I thought was interesting, we had a big sell uh drop down in oil prices yesterday. It was based on the tweet that Trump uh mentioned uh about the war, it looked like it's coming to an end quicker than sooner, sooner than later. And then uh you also had uh with that uh a couple of other things. You had the group of seven, the G7 nations come out agreeing to release oil from their strategic reserves and pump it into the system, stand ready to do so. Now they didn't do it. Why? Because there's a lot of oil in the oil, and they know that. We don't know if this is a short-term phenom or a longer-term issue, but they are prepared to do that. The other thing that crossed the headline yesterday, I think most people are missing, is this administration talked about potentially repealing the Jones Act. That's a shipping law related to U.S. born vessels, or it's 1920 law. It was designed to protect the shipping industry, and only U.S. flagged and crewed owned vessels can transport goods uh from U.S. ports to another U.S. port. So, for example, we had uh diesel coming in uh to the United States. Uh, actually, we left the U.S. with diesel, U.S. flagged container. We weren't flagged. It was a foreign container going to Europe with this diesel load. Puerto Rico had that hurricane in 22. Our ship could not stop. This ship could not stop in Puerto Rico to deliver diesel that they needed greatly because of the crisis. So they had to get a waiver for the Jones Act in order to deliver this diesel. It's a very convoluted law. And what we're seeing is movement to repeal the law. What's interesting, it was put in to protect this shipping industry back in World War II to boost shipping, right? Manufacturer shipping here in the United States. But it's one of the few protection laws that's waived every time we have a conflict. It doesn't work, right? So I think the talk of that Jones Act, so now I can take L and G from uh here in Louisiana, Texas, and take it up to the ports in New Jersey. So I bring this up because it starts to shift that dynamics again, once again, of the dependency upon crude. While these sharp crude swings, this issue that's happening in the Middle East may affect crude prices, et cetera. I don't know if it has as much of an impact on the Western hemisphere as it will with China that uses that crude or even Europe. And we talked about the ethane, the different components to manufacture goods. So the US is in a pretty good spot. So I think a lot of that's going on. There's a lot of fast moving parts in order to keep energy prices down. So I'm not I'm not really worried about that. I guess my bigger concern in Iran right now would be the boots on the ground. How many years will we have to be there? What's the objective? Well, we're then as quick as they think without the need. I don't know.

Natalie Picha 16:05

Yeah. Speaking of oil reserves, I know you've made a comment earlier that while the G7's talking about releasing some of their reserves, the U.S. reserves have actually not been, you know, uh resupplied as they they should have been. Um can you comment on that?

War Costs Deficits And Bond Yields

Glenn Royal 16:23

Yeah. So if you remember, uh during the Biden administration, we hit the Ukraine war, Russia invaded Ukraine, it oil prices went through the roof, 114 a barrel. And so what the Biden administration did was to bring relief to uh consumers was lower gas prices for at least an SPR. Uh at the peak, we were at 638 million barrels in the SPR max capacity. Well, at the top of capacity, he drew down 180 million barrels. We're now about 415 million barrels in an SPR. We've never replaced that to speak of of any volume. Just it fits and starts, 3 million barrels here, contracts with 12, different reasons. But so the point is we're the reserves we have today in the SPR aren't as ample as they were, and they will not be able to draw down as much as they did during the Biden administration, which gave us about 20, 22 days worth of energy here in the US. That's basically what we have in the reserves right now. So I think it's probably brought a little more daylight to the issue of the SPRs, the reason why these things were created in a post-World War environment. And I think we'll probably start to see that maybe refill, maybe a greater tent once this is done. I think Secretary Wright, energy sectors mentioned some about 20 million barrels, these $20 billion they're trying to put to refill it before the war started. So we'll see. But there's been a big drawdown. We don't have what we used to have, and we can't have that same impact on the economy if we draw it again.

Natalie Picha 17:58

Right.

Glenn Royal 17:59

It's an issue.

Natalie Picha 18:00

Well, I mean, that that leads us right into some conversations around the cost of this war. And we've had some conversations already in the last six to eight months about how the the current deficits are really impacting our economy and will impact into the future. Well, this war is not free.

Glenn Royal 18:18

No, no war is, right? Besides the human toll, a financial cost. And in that light, uh, what we're looking at is the bond market, right? That's another indicator. Uh the bond market is showing us in the longer uh ends of the uh the maturities. Uh we're seeing pressure there because uh this adds to the deficits. I've heard a billion today. It's kind of all of the map that we're adding each patriot missile is four million dollars against a $20,000 drone. You know, the economics of the war is upside down. We're spending a tremendous amount of money. It has to be paid for at a time we have deficits. Not to mention the potential uh concerns around Social Security and all that that's coming. So uh we're creating a real mess for future political leaders that they're gonna have to unwind. Uh, we need to get the deficits under control because what will happen is you know, you could win the battle but lose the war in the sense that if we lose dollar dominancy as the world's reserve currency, our deficits are too high, we become a weaker credit, a credit risk. Investors have other options around the world in sovereign debt, then our rates go up. Our dollar we uh becomes weaker, and that reduces our standard of living that we're so used to in a post-World War II environment. So I'm I'm kind of uh I'm watching that uh to make sure that dollar diplomacy is uh used properly, uh, and we don't really get into any situation where it it feeds into deficits, it feeds into higher interest rates and a reduced standard of living. And it's something that we we see whiffs of it here with these levels of deficits. Thing is, Natalie, I I don't know what level of deficits is gonna make the market just go, oh, this is too much. No one knows. Um, but we do know there is a point. We've seen it twice now in recent history. Saw Prime Minister in in the UK uh when she you know tried to uh cut taxes with no spending offsets, raise the deficits. We saw it in uh Japan recently. And what you see is these big spikes in yields. So our cost of living goes up as a result of that. So I'm we're watching that closely. Uh it's something that is not an imminent risk, but it's one of those things that uh, you know, this term Minsky moment, you just kind of wake up and boom, you know, all of a sudden you realize this isn't sustainable anymore. And we all realize it at the same time, and we all react negatively at the same time. So that's something that we have to watch. We need uh, you know, better elected folks to get a hold of that.

Natalie Picha 21:10

Yeah.

Glenn Royal 21:11

Do the responsible thing. Right.

Natalie Picha 21:14

So as investors, again, this is a we're having extreme volatility in the market. Um, it's an extremely complicated situation. What would you tell investors to do with their portfolios today?

Glenn Royal 21:27

Well, because you know, we talked about how event risk brings such sharp strong volatility. Don't react to the initial days, weeks of what we have. Let this thing fold out. Let's see how, you know, if energy prices do come down, it doesn't affect earnings. We're back to the trade that we had before. I would advise you uh, you know, talk with your financial advisors. We've had a lot of conversations over the course of the last year with our client base, where we would say, hey, If you think that there's more risk that you're taking that's necessary, de-risk when you have the opportunity for fixed income to pay five and a half percent. I'm thankful a lot of folks did that. So I would say a lot of our have already made that move and kind of prep for this unknown before the unknown happened, just by simply uh realizing that I got a burden in hand with bonds paying me 2% real yield, you know, things like that, taking advantage of the relative values in the market. And that's what we do all the time for our clients, looking for those relative values. So I would say you know, one is you know, call us if you're scared or concerned. We're here for you, always here for you. Give you some understanding what's going on to help you understand it. But uh at the moment, realize that this is a very fluid situation, it's very volatile, and this is the time when you can really get hurt by acting one way or the other in this market. Probably best is just kind of you know, if you're long and invested, understand what you own, see if there's any issues with what you own. Um, and if there's not, then the best case is just kind of grind through these periods. I the one thing I we don't try to give security recommendations or anything like this. You can always say treasuries because that's kind of plain vanilla, right? But I I I think it's just important that yeah, you have this sound plan, that you have a uh an asset allocation, and and then the one chart that always comes to my mind is an SP 500 chart going back to when I first started this business in 1984. Dow is around a thousand. We were just bragging about fifty thousand. So I've had all kinds of events risk off in my career, several major bear markets. I'm still here, you know. I've recovered everyone. The United States is still here. SP is more profitable and stronger than it's ever been. I don't think that that's going to change. So understand your horizon. Now, if my horizon is a year, I need to take a different consideration. But if I'm like our typical investor and I have a retirement or a college or education to plan for those years, don't let these kind of market events shake you out. If it becomes something that's more systemic, more like a 2008 event or a dot-com period, which we don't see, but uh we'll be on top of that for our clients and we'll be we'll be freaking out way before you'll be freaking out.

Disclosure

Natalie Picha 24:38

Well, I mean, I think um to your point, right? We as at RHP are a bit unique in that we give equal weight to our investment portfolios and the market performance, but also to the financial planning side of what we do, because we believe that a sound financial plan is going to inform how you're investing your dollars. And then if there those dollars are invested well over long periods of time, our clients are going to succeed. And that is what we will tell our clients is what does your plan tell you? Where are you supposed to be situated in this market and how much risk? What's your time horizon? And how can we make sure that that is right-sized for how we're investing the RHP portfolio? So the two go hand in hand and and they're both equally as important. So thank you, Glenn. This is this has been a great conversation. I think our our listeners will be very appreciative and to be getting this in in such a timely manner, considering what's going on right now. Again, I say thank you for your service. And then I want to say thank you to our listeners for joining us and for being faithful. Please remember to share this podcast. Please leave us a rating and a review. And remember, markets have navigated wars, recessions, political crisis, countless unexpected events throughout history. And while uncertainty can create short-term volatility, long-term investors are typically rewarded for maintaining discipline and perspective. If you found this helpful, please subscribe, share the episode with someone who can benefit from greater clarity and confidence, and visit us at RoyalHarborPartners.com to learn more. Thank you, Glenn. Thank you, Natalie.

Disclaimer 26:24

Royal Harbor Partners is a registered investment advisor, and the opinions expressed by Royal Harbor Partners on this show are their own. Registration as an investment advisor does not imply a certain level of skill or training. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. The information stated is for educational purposes only and is not intended to make any offer or solicitation to sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk, and unless otherwise stated are not guaranteed. The information expressed does not take into account your specific situations or objectives and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment advisor to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.