The Geopolitical Dilemma
Investors,
I have a confession to make…
I won’t analyze the Israel/Iran conflict, or any geopolitical conflict for that matter.
Why?
First of all, I’m not a geopolitical strategist.
Secondly, I’ve outperformed the market without being a geopolitical strategist.
Finally, even if I was a geopolitical strategist, I don’t know how to use that “skill” to make sound investment decisions and give myself a chance to outperform the market.
For example, this is how asset prices have performed since these three major geopolitical events over the past several years…
Since Russia invaded Ukraine on February 24, 2022:
The S&P 500 is up +45.2%, producing an annualized return of +12.1%.
Bitcoin is up +205%, producing an annualized return of +39.5%.
Since Hamas attacked Israel on October 7, 2023:
The S&P 500 is up +39.7%, producing an annualized return of +22.2%.
Bitcoin is up +275%, producing an annualized return of +123.1%.
Since Iran launched missiles at Israel on October 1, 2024:
The S&P 500 is up +5%.
Bitcoin is up +72.9%.
Most, if not all, geopolitical strategists used these events to suggest that a global conflict would unfold as a result and that asset prices would face immense pressure.
They said that European economies & financial markets would crater, but they haven’t.
They said that crude oil would make exponential gains, but it hasn’t found its footing.
This is the S&P 500 (top) and Bitcoin (bottom) with each of those dates highlighted:
So I ask you, with the intention of providing a warning regarding geopolitics and investing, is it even worthwhile, effective, or profitable to implement geopolitical analysis to navigate the markets?
The answer (at least for me) is, unequivocally, no.
But the fact of the matter is that 99.9% of you are just like me…
We aren’t geopolitical experts.
We aren’t able to produce an edge from geopolitics.
We don’t have inside knowledge about geopolitical events, risks, or their timeline(s).
And even if these three statements above are false, I reiterate the data that I shared above, showcasing how geopolitical risks, even when they materialized, failed to produce any alpha or direct material downside to the market.
So rather than put myself in an (ineffective) arena that I’m uneducated in, my solution is to maintain my focus on my core competencies and to simply follow price action, intermarket relationships, and statistical analysis to make decisions.
That’s it.
End of story.
And here’s the beauty of this concession…
If/when geopolitical risks cause direct material downside to the market, then I’m going to be able to use my indicators to identify market weakness, a shift into a risk-off environment, and to see a blatant decline in risk appetite.
How?
Asset prices (most notably the major U.S. indices and Bitcoin) will break below their various exponential moving averages, and those EMAs will develop a negative slope.
Risk-on vs. risk-off ratios (like VUG/VTV) will rapidly and materially decline.
Credit spreads and the CBOE Market Volatility Index will skyrocket.
Bullish setups will fail, resulting in failed breakouts and lower lows.
Oversold conditions will flash across the market.
In other words, the same tools that I’ve used to effectively navigate the market and outperform the S&P 500 will continue to be effective and produce strong results.
So my warning (and my simultaneous encouragement) to you is this…
Focus on what has worked for you, regardless of what it may be, and stay in your lane.
There is zero shame, whatsoever, in admitting that you don’t have an edge somewhere.
Especially if you already know which tools, methods, and strategies DO work for you.
Maybe those tools are the same as mine.
Maybe those tools are different than mine.
Maybe those tools are dependent on geopolitics.
Maybe those tools are based on the alignment of the stars.
I don’t care what the tools are, as long as they work FOR YOU.
Best,
Caleb Franzen,
Founder of Cubic Analytics
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DISCLAIMER:
This report expresses the views of the author as of the date it was published, and are subject to change without notice. The author believes that the information, data, and charts contained within this report are accurate, but cannot guarantee the accuracy of such information.
The investment thesis, security analysis, risk appetite, and time frames expressed above are strictly those of the author and are not intended to be interpreted as financial advice. As such, market views covered in this publication are not to be considered investment advice and should be regarded as information only. The mention, discussion, and/or analysis of individual securities is not a solicitation or recommendation to buy, sell, or hold said security.
Each investor is responsible to conduct their own due diligence and to understand the risks associated with any information that is reviewed. The information contained herein does not constitute and shouldn’t be construed as a solicitation of advisory services. Consult a registered financial advisor and/or certified financial planner before making any investment decisions.
Each investor is responsible to understand the investment risks of the market & individual securities, which is subjective and will also vary in terms of magnitude and duration.
Great post. Thanks.
Great stuff!
Is there an upside level for VUG / VTV that would give you pause; or is higher always better?