Investing During Wartime: A Realist's Guide

Happy Sunday

I wrote this framework last year during the Israel-Iran strikes. With four US carrier strike groups now parked near Iran and Geneva talks on Thursday potentially being the last diplomatic off-ramp before strikes begin, it feels like the right time to bring it back.

But I'm not just going to re-post it. I'm going to run the framework live on what's happening right now so you can see how I'm actually thinking about this as both a trader and an investor.

Let's dig in…

If you're new here, the short version: I don't listen to the geopolitics pundits on TV. Most of them peddle doom and gloom that makes for great headlines but is terrible for your portfolio. When missiles are flying, everyone wants to sell everything and hide under a rock. That's usually the wrong move.

The framework

There are four questions I run through every time a geopolitical crisis flares up. They're designed to separate real economic damage from temporary fear. Most crises only produce fear. The market prices in fear fast and recovers from it even faster.

The default response to a geopolitical crisis, backed by decades of empirical data, is to buy risky assets as they sell off. Only when one of the first three questions below gets a "yes" do you need to reconsider that.

Running the framework on Iran right now

Question 1: Is critical US infrastructure damaged or destroyed?

Ports, railways, power grids, communication networks.

The answer: No.

Whatever happens between the US and Iran, it's happening 7,000 miles away from the NYSE. American infrastructure is completely untouched. This question is more relevant if you're investing in regional markets directly affected by conflict. For US equities, we move on.

Question 2: Will this create persistent inflation pressure lasting over a year?

This is the one question that actually made me pause.

The Strait of Hormuz carries roughly 20% of the world's oil supply. Iran has already been doing military drills near it and briefly closed it for a few hours last week. If they actually block that strait for an extended period, oil doesn't just spike, it goes vertical. Brent is already back above $70 on pure anticipation.

So here's the thing. If this question gets a "yes," you want to be in energy companies, defense contractors, and gold miners. You want to avoid low-margin businesses that get crushed by input costs, think consumer goods, most industrials. You lean toward companies with low debt and stable earnings like pharma, regulated utilities, and essential services.

One detail most people miss: equities only provide inflation protection up to about 4% inflation. Above that, businesses can't pass through cost increases to customers fast enough and margins get compressed.

My answer: No, but monitor it closely.

Here's my reasoning. The Strait of Hormuz has never been fully closed for an extended period. Not during the Iran-Iraq war. Not during any of the various standoffs over the past 40 years. The US Navy's entire force projection doctrine in the Middle East is built around keeping that waterway open. That's literally what carrier strike groups are designed to do.

Short-term oil spike if strikes happen? Almost certainly. Persistent 1yr+ inflation driver? I'd put that probability pretty low unless this escalates into something we haven't seen since 2003.

If Geneva talks collapse Thursday and strikes begin, come back to this question. If Hormuz actually gets blocked for weeks, not hours, the playbook changes. Until then, we move on.

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Question 3: Will this persistently affect real interest rates for over a year?

Central bank policy changes, government financial repression, massive war financing.

The answer: No.

The Fed isn't hiking rates over a temporary oil shock from Middle East tensions. They'd look through it the same way they've looked through every short-lived supply disruption. Unless this becomes a prolonged ground war with massive US fiscal spending (which nobody is seriously suggesting), real rates aren't moving because of this.

Question 4: Have you answered "no" to all three questions above?

Yes. Which means this is a pure risk premium event.

The geopolitical shock isn't damaging US infrastructure, isn't creating persistent inflation, and isn't moving real interest rates. All it's doing is making people nervous. That nervousness pushes equity risk premiums higher and stock prices lower temporarily while the underlying businesses are completely unchanged.

These fear-driven selloffs typically last days to weeks. This is where you buy.

What history tells us

I keep a mental list of these. Every time the pattern is roughly the same: panic, selloff, recovery.

9/11 attacks: Markets shut down for nearly a week because the financial district was a disaster zone. When trading resumed, the Dow immediately tanked 7.1% and kept falling. Three weeks later? Fully recovered.

London bombings: Markets dropped hard at the open. By close that same day, they'd bounced back to only 1.4% down.

Russia invades Ukraine (2022): Initial panic, ten-day selloff, then full recovery to pre-invasion levels. The sustained decline only came later when markets started pricing in persistent inflation from energy disruptions, which is exactly what Question 2 is designed to catch.

Israel-Iran strikes (June 2025): 12 days of air attacks. Markets wobbled, oil spiked, everyone panicked. It passed.

Each time, the people who kept their heads while everyone else lost theirs came out ahead.

How I personally hedge this

I don't short the market in situations like these. If I'm wrong about the direction, a short can bleed you out. Instead, I hedge with VIX products (usually over weekends)

The logic is simple. If I'm wrong and the crisis fizzles, the VIX doesn't move much against my position. If I'm right that volatility spikes, VIX products move aggressively in my favor.

$VXX is usually my go-to for this.

The bottom line

The Iran situation is serious. Four carrier strike groups is not theater. Trump's 10-15 day ultimatum is not ambiguous. Geneva on Thursday is a genuine inflection point.

The people who do well in these situations aren't the ones with the best geopolitical predictions. They're the ones with a framework that keeps emotions out of the equation.

Don't panic. Have a plan. Execute it.

Stay curious 🙂 

- John

Always conduct your own research and consult with a financial advisor before making investment decisions. This analysis reflects Pivot and Flow's views and isn't personalized advice. All investments carry risk, including complete loss of principal.

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