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A few weeks ago, when I first wrote about the Iranian War, I discussed the Strait of Hormuz blockade and its potential impact on oil prices and, by extension, inflation. At the time, the Strait had been closed for only a few days.
It has now been closed for three weeks, and there is little indication it will open anytime soon. The market is starting to price in the possibility that this could last a while. As a result, oil prices have skyrocketed to ~$115 per barrel (it was $72 before the war started), putting downward pressure on both stocks and bonds. Even gold and bitcoin have sold off.
I wanted to note that the Strait is not just about oil. Countries like Kuwait, Bahrain, Qatar, and the UAE depend on the Strait and its imports for basic necessities. Roughly 70% of the food consumed in these countries moves through the Strait of Hormuz. Since the blockade, meat prices in the Gulf have nearly doubled, and retailers are chartering flights just to bring in fresh produce.
Iran’s Strategy
Iran has been quite effective in blockading the Strait. It effectively created a kill box, using its long shoreline and the Strait’s narrow geography to its advantage. While the narrowest point of the Strait is 21 miles, the navigable shipping lane is just two miles wide. Here are a few ways Iran has been able to close this shipping lane:
- Mines: This is probably Iran’s most effective weapon. Iran reportedly has thousands of low-cost mines that can be deployed in ways that are difficult to track: civilian fishing boats, fast attack craft, and even midget submarines. Only a limited number of well-placed mines would be needed to threaten the main shipping channel.
- Cruise Missiles: Iran can also use its mountainous shoreline and offshore islands to conceal anti-ship missile launchers. Military strategists believe Iran has a number of underground caches and caves where it stores its launchers and missiles. This makes it extremely difficult for the U.S. to locate and destroy them.
- Fast Attack Boats: Last week, Iran used an unmanned fast attack boat to sink a shipping vessel. These are remote-controlled suicide boats packed with explosives. They are much faster than the slow, lumbering cargo ships they target, and they can be steered directly into a ship’s hull.
- Shahed Drones: These drones are manufactured in both Iran and Russia and are relatively inexpensive to produce and operate. It is estimated that it costs $35,000 per unit to make and that Iran has tens of thousands ready for deployment (though that number is difficult to confirm, for obvious reasons). Because they’re cheaper than traditional air defense systems, they can overwhelm air defenses through sheer numbers.
The Marines Are Coming
The U.S. severely underestimated Iran’s ability and willingness to block the Strait of Hormuz. As a result, the U.S. is sending the 31st MEU (~2,200 Marines) to the Middle East, with their arrival expected by the end of March.
The assumption here (a very strong one) is that the U.S. will use this ground force to reopen the Strait. These Marines are part of a Marine Expeditionary Unit, which is designed for situations like this: maritime raids, seizing and holding small islands, and clearing coastal threats. Earlier this month, they participated in a major exercise in Japan that involved amphibious assault drills that focused on capturing hostile terrain.
The deployment signals a significant escalation. Up until now, the conflict with Iran has been almost entirely conducted from the air. Putting Marines on ships near the Strait essentially opens the door to ground operations.
The question is how these Marines will be used. Will they be used to seize Iranian-controlled islands that overlook the shipping lane? Will they conduct raids along the coastline to take out anti-ship missile sites? Will they simply be there to establish a presence to deter further attacks on commercial vessels? Or all three?
What This Means for Your Portfolio
With all this going on, the natural instinct is to do something. Sell stocks. Go to cash. Wait for the dust to settle and get back in when things have calmed down.
That would be a mistake. Attempting to time the market based on what you think it will do is essentially trying to predict the future. There are simply too many variables to consistently do this over time, and it’s one of the worst things you can do to your portfolio. Period.
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To pull it off, you need to be right twice. When to get out, and when to get back in. Getting just one of those wrong can be devastating to your long-term returns.
The reason most people fail at this is that we are wired this way. The human brain is wired to make terrible investment decisions under stress. It is painful to see your portfolio decline over time. So, the natural reaction is to limit those losses. Tens of thousands of years of evolution taught us to run away from the hungry tiger. Not towards it.
Loss aversion makes the pain of a loss feel roughly twice as intense as the pleasure of an equivalent gain. Recency bias causes us to extrapolate the last few weeks into forever. The market drops, and we assume it will keep dropping. And the media is designed to get more clicks, not protect your retirement.
According to a study by J.P. Morgan, a $10,000 investment in the S&P 500 over 20 years (2005 to 2024) would have grown to $71,750 if you stayed fully invested. Miss the 10 best days, and that figure drops to $32,871. If you were to miss the 20 best days, you are down to $19,724.
My favorite stat is that 6 of the 10 best days occurred within two weeks of the 10 worst days. If you sold during the panic, you almost certainly missed the recovery.
Stay the Course
None of this means the situation is not serious. It is. Oil is above $100 per barrel, and it might get closer to $200 before all of this is over (who knows). But the right response is not to panic. This, like all situations, will pass. Now is the time to make sure your asset allocation is correct. If you have extra cash on the sidelines, maybe now is the time to consider dollar-cost averaging into the market, as it isn’t a bad idea.
The point is that if you have your goals laid out, if you (truly) know your risk tolerance, and if your portfolio is already well allocated, then stay the course.
Turn off the news for a bit. Stop scrolling. If you have questions about how this affects your specific situation, reach out. That is what we are here for.
