The Dividend Cafe - War, the Middle East, and Markets

Episode Date: June 27, 2025

Today's Post - https://bahnsen.co/4keWgqq Middle East Geopolitical Tensions and Market Unpredictability In this episode of Dividend Cafe, host David Bahnsen discusses the recent geopolitical events in the Middle East, particularly Israel's and the US's actions against Iran's nuclear capabilities. Despite predictions of market volatility, equity markets have risen, and oil prices have fallen, illustrating the inherent unpredictability of market responses. Bahnsen emphasizes the importance of maintaining an objective investment philosophy, specifically dividend growth investing, amidst such unpredictable events. He argues against trying to time the market based on geopolitical developments and underscores the need for a consistent investment approach to avoid significant mistakes and drive long-term success. 00:00 Introduction to Dividend Cafe 00:43 Shifting Focus: From Bubbles to Geopolitical Tensions 02:43 Market Reactions to Middle East Conflicts 07:27 Unpredictability in Markets 09:33 Historical Context of Middle East Tensions 15:14 Investment Philosophy Amidst Geopolitical Events 18:23 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Dividend Cafe. I am your host, David Bonson, managing partner, chief investment officer of the Bonson Group, who has the distinct privilege of every Friday bringing you my macro commentary on whatever topic I select. And I had a topic selected a couple of weeks ago that I was going to write about this week, kind of unpacking more of this subject of bubbles and issues related to valuation and where we sit in the market and looking at the history of bubbles,

which I think is just an incredibly important topic, and there's gonna be some nuances in what I say about this. But then a week ago, on Saturday night to be precise, the announcements came through that the United States had launched its own operation Midnight Hammer, and what an operation it was. Watching the news late into the night Saturday and absorbing everything throughout Sunday, and then the way in which you would have expected markets may end up responding earlier in the week. I thought this may not be a good week to do a special issue about bubbles.

Let's definitely keep it in the Middle East. Let's look at what's going to be happening with oil, with markets, with volatility as ongoing geopolitical tensions escalate in the aftermath of first Israel's actions in Iran over the last two weeks, and then the United States joining the fray to weaken Iranian capacity for nuclear capability. And now I'm really glad that I made the decision to write about this this week,

despite the fact that markets are up massively, despite the fact that oil is down substantially, despite the fact that nobody looking at market charts this week would believe at all that anything has happened in the Middle East, let alone a high profile, highly newsworthy, highly contentious decision for the Trump administration to aid in and produce U.S. resources towards the elimination of Iranian nuclear capacity. The reason that I'm saying I'm glad I did it is it gives me a chance to reinforce an

entirely different market lesson, and that's what we're going to talk about today. I go through a hypothetical conversation in the writtendividendcafe.com this week where where I basically say if I was sitting down on June 13th, two weeks ago, and said to another person, I have a crystal ball and I can right now tell you that Israel is about to attack Iran in the most significant, substantial, expansive, targeted, sophisticated, destructive attacks in well over 50 years in the region.

That they were going to kill numerous high profile senior Iranian leaders, that they were going to kill significant amounts of those in their nuclear science program that Iran was going to vow bloodshed and retaliation in response, you would say, holy cow, I can't believe you're predicting this and markets are surely going to be affected. And presumably, equity markets and risk assets negatively, and oil commodity prices, presumably, would be skyrocketing higher. And then if I said to you, by the way, this crystal ball is also telling me that the US is going to sort of act like it might get involved but might not, and then say, well,

we're going to think about it a couple of weeks, but then a couple of hours later, drop 14 bombs on Iranian nuclear capacity, bringing a B-2 bomber halfway around the world to do such, and that Iran would again threaten retaliation and so forth. You would think, well, yes, there is going to be significant volatility and probably downward pressure on equities, fear of war breaking out, and then global commodity supply being cut off in some form of upward pressure on oil prices. And then if I were to say to you, well, actually it's interesting because today is June 13th and I'm looking at my crystal ball and as I'm talking, the Tao is literally at 42,198, which is where it was on June 13th. And that as I'm sitting here recording for you right now, the Tao is at 44,000. So what you basically got was this crystal ball being accurate. You fast forward a grand total of 14 days, and it's just nine and a half market days.

There was a market holiday in there on Juneteenth. And you have an equity market that is up about 4% and oil prices that had gone at one point from 68 to 75 but are sitting right now around 65 that are down 4%. Stocks up for oil down for as both Israel and the US attack Iran. Now tell me who would have predicted that. Tell me who would have predicted what Israel was going to do. At the time, without US involvement, we obviously know behind the scenes there had to have been US support, that there was absolutely no indication the US was about to get involved with an attack.

No indication that Iran would be unable or unwilling to respond in any meaningful way. No indication a ceasefire was going to come, even if it holds for only five more minutes. You've now gone five days without any meaningful response. That the nuclear capabilities of Iran were either going to be obliterated or a significantly diminished, regardless of what one's own political priors cause them to try to say or do. I have the distinct advantage in this case of not having political priors that force me to change my view of facts, to be compatible with what I want to be the case, who I hate or who I love, that markets contain this really significant objectivity.

And I believe that I have a similar objectivity or have tried my very best to maintain an objectivity around these things. And it doesn't feel like a stretch to me, even as someone who's been, by the way, very critical of President Trump on certain things, to at least objectively say that some form of significant damage has been done to Iranian nuclear capability. This is not primarily a political story for our purposes. What you basically have was that the Israel-U.S.-Iran story was not predictable. The aftermath was not predictable.

The market response to those actions was not predictable. The market response to the aftermath was not predictable. And then there was a multi-causal reality in markets that even apart from what exactly did happen with Israel, Iran, US, et cetera. There's also an AI capex story that's still going on. There's also a Fed will they or won't they story that's still going on. There is very high confidence in Q2's earnings that has come back into fray and we go into

the earnings season in a couple of weeks. That's still going on. There is improvement in US-China trade talks, including the completion or apparent completion of at least a framework of a deal. So you combine this unpredictability of actions, unpredictability of aftermath, unpredictability of market response, unpredictability of market response to aftermath, and then other causation around it. And what you get is an assurance of unpredictability, and that is never going to change. And yet in all these things, we have people that believe they could get the timing of

all these things right and allow it to impact their own market decision-making. I believe that it is a very, very consistent approach to this to say that no one will be able to predict the fact patterns, no one will be able to predict the market response to the facts, and no one will get the timing of either of those things right. And yet somebody is going to try all three of those things. And that is to me the real lesson of the last couple of weeks. But I should make it clear, we're not just talking about the last couple of weeks of markets were up for and you would think they'd be down for as there's been geopolitical escalations.

I've written in the Dividing Cafe before, and the link is there at DividingCafe.com. The very Dividing Cafe I wrote the week after, the utter unspeakable atrocity of October 7th, 2023 of Hamas's attack on our allies Israel. That we are dealing with a 50 year history that I've studied immensely around Middle East tensions, including the unspeakable events of 9-11 that came to the US's own shore.

Looking at the Iraqi attack on Kuwait in August of 1990, the US intervention into that conflict in January of 1991. The dozens of various attacks involving Israel, Hezbollah, Hamas, Lebanon, other major issues, sometimes it brought US in, sometimes it didn't. Drone attacks from Iran into Saudi Arabia. I mean, this is a situation where I had to pick the top eight in that article I wrote at Dividing Cafe. Again, the link is there, DividingCafe.com. And I was picking eight from 30, and that was picking 30 from 100 if you wanted to get into all kinds of other smaller type incidents. There is a history in the Middle East that is a history of bad things happening. Markets sometimes responding for two days,

sometimes responding for two months, and always moving forward. The Dow is up over 500% since the 9-11 aftermath, and that was an attack on our own soil that killed thousands of Americans. So you really are not talking something investors really should respond to even if they could, but you are looking at overwhelming empirical evidence that they couldn't even if they tried. And I think to outside of this Middle Eastern analogy last couple of weeks, we're not even

yet three months old from the tariff debacle, the post-liberation day swoon, where on a Thursday, Friday, Monday, Tuesday, going into Wednesday morning and four and a half market days, the market was down 5,000 points and could very well have gone down another 5,000. Were it not for the president reversing his decision around the trade tariff threats he had made? And yet markets are higher than when they started. Who would have predicted exactly what policy was coming? I got an email in that month from someone saying it was so obvious markets were going to collapse under President Trump. And it was so obvious exactly what President Trump was going to do.

And it was so obvious where things were going to go. And every one of those things proved not to be obvious. By the way, this person obviously had some sort of hatred of President Trump. I have gotten a million emails over my career when people said that it was so obvious markets would tank under President Biden for other reasons. I come back to that political example, because it's front and center as the tribalism of our country is intensified throughout my adult life.

But from an investing standpoint, people tell me all the time something's obvious that proves to not be obvious five minutes later. And that's all right that people get things wrong, but with markets, be wrong without saying something was obvious, because nothing is obvious. Nothing in the Middle East is obvious. The only thing I would say is obvious is that we are not going to anytime soon see full blown peace in the Middle East.

And I understand some right now are gonna say, no, no, we've done it now. The administration's actions meant there would be no more conflict in Middle East. It's not a serious thing to say. I hope that we've severely impacted Iran's ability to be a nuclear threat. But even then, that's not peace in the Middle East.

There is a religious, historical, geopolitical, military, sectarian divide in that part of the world that is thousands of years old. There's been evidence in markets for hundreds of years. It's been part of our own modern story for decades. It's not going away. The idea that one would time their way around it

or use things like that or their presidents policies, what they like and don't like. You try to supersede the reality of what you're supposed to be investing for is crazy. We're not going to do it. What do I think is happening in Iran? What US action in Iran in particular? I think if I can quote from the research of my dear friend, Renee Annanalli Corbu, I would look at it as establishment of a military deterrence that is both relevant to Iran,

but other, shall we say, actors who are watching as well. I think that it is evidence of an enhanced commitment from the US to nonproliferation, that there is a significant priority that actors who do not currently have nuclear capability are not going to be allowed to get it, a so-called Trump doctrine around that issue. And I think that there was a desire to demonstrate, particularly going into NATO week, the precision global reach that the US has. This was strategic, accomplished a number of other goals. People can like it or not like it.

They can like the administration, not like it, or they could be a normal human being who likes things they like and doesn't like things they don't like. That's the part of humanity I want to fall into. But in this case, from a market standpoint, I think that there's a very clear next step around this. And that next step is to be focused on what is controllable in your portfolio and not what is not controllable, to be focused on what is knowable and not what is not knowable. And if the Middle East isn't the best example you can think of of what is both uncontrollable and unknowable, I don't know what is. I think

that there is very little appetite in the United States, both in the public and in the administration, for a prolonged war, risk of US lives, some of those issues that you could think maybe markets might be concerned about right now or not. And they're probably not worried about it for good reason. Iran could retaliate. Iran could escalate. There is not very likely to be a US war involvement. For an hour or a day or a week or what have you, markets may not know exactly that.

Similar to the trade issues, the president can huff and puff and tweet, but there is a general path in which we see things are going to. There will be another unpredictable things that will come along and shake up markets. I'm going to continue saying and talk more about this next week, the biggest risk markets have right now is not Iran or trade war. It's 23 times forward earnings. So I'm not trying to say everything is rosy for index investors.

What I am trying to say is that for dividend growth investors, we're not going to change our plan around Iran. We're not going to change our plan around politics. We're not going to change our plan around valuation because we want to function within a reasonable valuation universe to begin with. And that's what our approach right now is. People keep asking me, what's the play? What's the play in the dollar on the trade war?

What's the play in the bond market on Iran or in commodities? What's the play in some of these event-oriented things? The media asked me that a lot and I always hold to my consistent answer and you're certainly not gonna get any different consistency from me here in the Dividend Cafe. You don't have a play, I have an investment philosophy. The investment philosophy is in my mind far superior

to other ways of doing equity investing when it comes to both the defense and offense that dividend growth investing offers. That is our philosophy that transcends being a play. Some companies are going to benefit more than others at certain points in time. Some are going to have opportunistic dividend reinvestment. Some, you know, we're actively managing within those sleeves, but there's no play around it. And for those who are trying to go achieve a play, sometimes you see a market that in two weeks confounds everybody, even as war is breaking out

on the other side of the world. Those confoundments are the rule, not the exception. Markets are humbling things. Dividend growth allows us to invest in the context of our humility, our much-earned humility, I would add. I'm glad for a successful operation that the U.S. carried out in Iran, so-called Operation Midnight Hammer.

I hope that we get further validation of a better understanding of success. And in the meantime, I hope that the success in your portfolio comes from avoiding big mistakes and making the decisions and maintaining the discipline that helped drive the right results over time. To that end, we work here at the Bonson Group and I want to thank you from the bottom of my heart for watching, listening, and reading The Dividing Cafe. Have a wonderful weekend. Stay cool and we'll be back with you Monday as we bring back the final day of the first

half of 2025 in The Dividing Cafe. Have a wonderful weekend. Take care. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC member FINRA and SIPC with Hightower Advisors LLC a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment

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