Playing Defence on the Gaza conflict with the All-Weather Portfolio

By Dale Roberts

Special to Financial Independence Hub

There is no avoiding the crisis and tragedy of the Israel-Hamas war. While nothing can begin to match the humanitarian concerns, we will address the financial, economic and global risks. Preparing for war is preparing for risk and uncertainty whether that be a humanitarian crisis or a financial calamity. The risks and events can commingle and merge together as well. In the past this blog has looked at the global war on COVID-19, the invasion of and ongoing war in Ukraine and now the war in the Middle East. To no surprise the risk management answers are quite similar.

It was a week Saturday that we woke up to the tragedy in Israel. A declaration of war soon followed. The potential of escalation and economic shocks is real. Of course we pray for the most peaceful outcome as is possible. As of this writing, that peace appears to be a distant hope.

While stock markets mostly took the events in stride, risk-off assets certainly did respond. Gold, bonds and energy moved higher.

The memory of oil shocks

A headline on Seeking Alpha offered that – Oil prices rise as investors fear a wider war with Israel’s advance into Gaza. From that post …

Energy stocks enjoyed their best week since June, with the S&P 500 Energy Index +4.5%, as oil prices surged ahead of Israel’s imminent advance into Gaza that could cause violence to spill over into other parts of the Middle East, potentially causing disruptions to oil production and shipments.

And this is surprising, from that same Seeking Alpha post …

A less publicized factor also affected oil prices: The Biden administration for the first time began enforcing Russian oil sanctions announced last year, penalizing two tankers for carrying Russian crude oil above the West’s $60/bbl price cap.

Oil is up over 7%, while gold is up 5.5% over the last several days. Don’t forget to rebalance when risk-off assets move in violent fashion. We can see how gold moved up considerably in 2020 with the invasion of Ukraine. It then settled into a range as the world ‘got used’ to the ongoing conflict. Gold price …

Of course, no one knows how events in the Middle East will evolve, and how far the conflict might spread around the globe. Let’s not forget that it was the oil shock that ignited the stagflation period of the 1970’s.

The Purpose Real Asset ETF PRA/TSX was up 2.5% over the week ended October 13.

Even bonds caught a bid as a defensive asset with the Canadian bond market (XBB/TSX) up 1.6% and longer term U.S. treasuries up 2.5%.

Defense stocks for defense

And it should be no surprise that defense stocks are on the move as the world powers militarize to face the mounting threats in the Middle East, Europe and Asia. Northrop Grumman Corporation (NOC/NYSE) is up over 14% over the last several days and Raytheon (RTX/NYSE) is up over 6%. We hold Raytheon in one account. It was a spin-off from United Technologies.

Ray Dalio attracted some attention this past week suggesting that there is a 50% chance of a world war. I always have time for Dalio, his understanding of credit and financial, economic and political cycles is worth consideration.

Of course, predicting the timing of these ‘large’ events is more than difficult. But we can see the order in which they evolve.

And once again the strategies for managing most risks follow a few of the same principles. We can be ready for most anything with an all-weather portfolio approach.

In my opinion, the all-weather approach should be a consideration for retirees and near retirees. Those in the accumulation stage might stick to a well-diversified equity-heavy approach, while investing within their risk tolerance level. That said, I think some dedicated inflation-fighting assets is important for most every investor.

How did the pandemic portfolio perform?

I like the idea of a mix of PRA/TSX and oil and gas stocks.

Of course, you will make up your own mind on that front.

The all-weather portfolio model has greatly outperformed from 2020.

After the rate hike pause

And here’s why the markets (perhaps) were looking to make a move as the central bankers in the U.S. tip that we might be at the end of the rate hike cycle.

If history repeats, we’d be in a period where stocks and bonds both perform well. But we see bonds (UST) outperforming stocks.

Dale Roberts is the owner operator of the Cut The Crap Investing blog,  and a columnist for MoneySense. This blog originally appeared on his site on Oct. 15, 2023 and is republished on the Hub with permission. 

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