The Strait of Hormuz: No Strait For TACO
When the Iran war broke out on February 28, financial markets reacted with uncertainty but without panicking. Two narratives initially kept volatility in check: history suggests that geopolitical shocks rarely have a lasting impact on the real economy. And the now familiar pattern known as TACO – “Trump Always Chickens Out” – seemed to be on investors’ minds: in the recent past, US President Donald Trump’s policies repeatedly triggered shocks, only for him to pull back when markets became stressed. The implicit expectation was that de-escalation would occur again this time.
However, this hope fundamentally underrates the nature of wars. While a trade conflict remains politically manageable, since a single decision is all it takes to end it, a military conflict eludes unilateral control. An old insight applies: starting a war requires one decision, but ending it requires two. The Iran war serves as an example in this context: in response to attacks by the US and Israel, Iran is blocking the Strait of Hormuz and is deliberately destabilizing the entire Gulf region. There is no sign of unilateral concession. A TACO moment would depend on one party being able to de-escalate on its own, which does not appear feasible given the circumstances.
What does this mean for investors? Above all: acts of war are unpredictable, but their influence on financial markets is well documented. Be it after the outbreak of the Gulf War in 1990, the Iraq War in 2003, or Russia’s invasion of Ukraine in 2022, markets recovered faster than sentiment suggested. Those who resorted to selling when these wars erupted later regretted their decision.
The outcome of this war is uncertain, but investor behavior should not be. Diversification, a clearly defined investment horizon, and liquidity reserves are not crisis measures; they form the foundation of every robust investment strategy.
Enjoy the read.
Kind regards,
Gzim Hasani, CEO
Bekim Laski, CFA, Chief Investment Officer