Will The Iran War Crash The Markets? | Michael Lebowitz

High-level summary

RAA’s portfolio managers are navigating a short-term geopolitical shock (U.S./Israel–Iran hostilities) while sticking to rules-driven portfolio management. They reduced net equity exposure modestly (about 6–7%) and are watching technical “lines in the sand” rather than trading on gut reactions to headlines.

• Geopolitical events can spike near-term volatility (oil, dollar), but most public market assets reflect long-term cash-flow expectations.
• Managers prioritize process (diversification, hedging, technical triggers, fundamental screens) over speculative calls on war outcomes.

Frameworks, processes and playbooks

Rules-based exposure management

• Pre-defined technical triggers determine reductions in exposure to avoid emotional decision-making.
• “Write your rules down” — maintain a plan for when to trim or add risk and follow it.

Technical playbook (primary short-term decision rules)

Key indicators and “lines in the sand”:

• Moving averages: 20-, 50-, 100-, 200-day MA.
• Trendlines, lower-low formations.
• Momentum/volatility indicators: MACD crossovers, RSI, ATR.
• Actionable warnings: trading below the 100-day and 200-day MAs; repeated closes below key moving averages would trigger further reductions.

Fundamental / valuation playbook

• Use trailing P/E, forward P/E, and PEG (forward PE ÷ expected 3–5 year growth) to evaluate value vs growth.
• Don’t equate ETF label (“value”) with cheapness — check company-level forward multiples and growth expectations.

Credit-market surveillance playbook

• Daily monitor corporate credit spreads (investment-grade BBB, high-yield) and ETF proxies (LQD, JNK, IEF) as a “canary” for systemic credit stress.
• Watch private credit redemption behavior (gates) and delinquencies/defaults as early-warning signals.

Macro / balance-sheet focus

• Monitor 10-year Treasury yields, term premium and deficit-spending expectations — deficits and war-related spending can push yields higher despite safe-haven flows.

Key metrics, KPIs, targets and timelines

• Oil (WTI): moved from ~$65/barrel to ~\$90/barrel in the immediate aftermath — a short-term/multi-year high; duration unknown.
• U.S. 10-year Treasury yield: ~4.0% before the Iran news; ~4.15% during the discussion.
• 30-year Treasury futures price: fell from ~119 to ~116 (price proxy).
• Corporate credit spreads:
  • BBB spread ~103 bps over Treasuries (index). Historically in the lower third over 20 years, but has recently widened.
  • High-yield spreads widened more; JNK underperformance vs LQD is a watch signal.
• Private credit: examples of redemption requests exceeding allowed limits (e.g., 9–10% demand vs 5% allowed); reports of delinquencies/defaults in certain managers/funds.
• Jobs / labor:
  • BLS payrolls: -92,000 (large miss); unemployment 4.3% → 4.4%.
  • ADP/private payrolls: lower but positive trend (30–40k/month), viewed as a more stable signal of subdued hiring.
• Retail sales: -0.2% month (prior month 0.0%) — real spending weaker (not adjusted for inflation).
• Portfolio positioning changes:
  • Net exposure reduced by ~6–7% over recent weeks.
  • Tactical buys: Nvidia (to model weight), Salesforce (1% position), ServiceNow (1%), Microsoft (to model weight).
  • Small trims / profit taking: Altria, Visa, Verizon, Walmart, Duke Energy, JP Morgan, Kinder Morgan, Berkshire Hathaway, BlackRock.
• Market internals / YTD factor returns (examples):
  • Large-cap growth/mega names down ~3% year-to-date in one snapshot; value up ~5.6%.
• Valuation signals highlighted:
  • NVIDIA forward P/E ~17 and PEG well below 1.
  • Walmart forward P/E ~37 and PEG ~3–4; Costco PEG ~4 — examples used to show some “value” names have high forward valuations.

Concrete examples, case studies and actionable recommendations

RAA portfolio actions

• Reduced overall exposure by ~6–7% as a precaution while monitoring technical signals.
• Opportunistic buys: Nvidia, Salesforce, ServiceNow, Microsoft (brought back to model weights or initial small positions).
• Profit-taking (small trims) across several positions perceived as expensive or rebalanced.

Advice for advisors and DIY investors

• Trade the market you have — don’t try to out-forecast markets on geopolitical outcomes unless you have conviction and better information.
• Use written rules and technical triggers to govern reductions/additions; avoid emotional trading.
• Monitor a compact list of cross-market signals daily: oil price, 10-year yield, corporate credit spreads (BBB), JNK vs LQD vs IEF, dollar strength, CPI/PCE releases.
• Keep portfolios diversified across sectors and factors; make gradual rotations (small trims/adds) rather than large, abrupt changes.
• Consider hedges if concerned (example cited: buying SH ETF as insurance).

Monitoring tools & dashboards

• RAA’s SimpleVisor dashboards: credit-spread screens (BBB, high-yield), sector excess-performance grids (75-day windows).
• Forward PE and PEG heatmaps (FinnViz referenced).
• Recommended daily surveillance models: compact cross-market dashboard with oil, rates, credit, dollar, and key macro releases.

Private credit watchlist

• Watch for spillover from private credit stress into public corporate credit:
  • Widening IG spreads.
  • Banks’ stock performance and exposures.
  • Liquidity/redemption behavior in private funds (gates, manager liquidity stress).
• Key indicators: redemption gates, defaults/delinquencies, and manager-level liquidity signals.

Dollar considerations

• Dollar strength (rally since late January) can be more consequential than oil for some sectors:
  • Raises foreign-currency borrowing costs.
  • Hits multinationals’ reported earnings.
  • Pressures precious metals.
• Monitor USD breakouts vs range for sector/earnings impacts.

Management, leadership and organizational practices

• Experience + process: mix of seasoned judgment (“gray hairs”) and systematic rules to override emotional impulses during crises.
• Transparency & client communication: public weekly updates showing real-time decision-making — an educational practice for clients.
• Small, staged adjustments: emphasize incremental/tactical rebalancing and profit-taking rather than abrupt changes — consistent with risk governance.

Market dynamics and execution notes

• Geopolitics vs markets: markets price probabilities; information asymmetry means some institutional players may move prices ahead of wider recognition.
• Bond market takeaway: recent yield rises interpreted more as term-premium/deficit reaction (higher borrowing needs from war-related spending) than pure flight-to-safety.
• Inflation view: oil can be inflationary short-term but has weak correlation to CPI (R² ≈ 0.20). The Fed often looks through temporary commodity spikes and focuses on core measures.
• Rotation nuance: the “value” rotation may have bought businesses with higher forward valuations (high forward PEs/PEG), so reverting back to growth is plausible and being positioned for.

Actionable watchlist (daily/weekly)

• Technical triggers: closes vs 100- and 200-day moving averages; MACD and RSI; lower-low formation.
• Credit spreads: BBB spreads (bps over Treasuries), high-yield spreads, and ETF pairs JNK / LQD / IEF.
• Bond yields & term premium: track 10y and 30y yields and 30y futures; monitor deficit/war-spending headlines.
• Oil price (WTI) and duration of any supply disruptions (e.g., Strait of Hormuz).
• Dollar index: watch for breakout above recent range.
• Macro datapoints: CPI/PCE releases, payrolls (BLS), ADP prints, retail sales.
• Private credit signals: redemption gates, defaults, and manager liquidity stress.

Risks & caveats

• Geopolitical events are hard to time; public markets price probabilities — betting against consensus requires conviction and often better information.
• Private credit is opaque; risks include defaults, leverage, and potential exposures of larger financial institutions.
• Valuation distortions can exist across ETF/factor labels — always check company-level forward fundamentals rather than relying on label alone.

Presenters and referenced sources

• Presenters:
  • Adam Tagert — host, Thoughtful Money
  • Michael Lebowitz — portfolio manager (RAA/RLM)
  • Lance Roberts — RAA partner / colleague (frequently referenced)
• Tools and data sources mentioned:
  • SimpleVisor (RAA tool), FinnViz valuation heatmaps
  • BLS payrolls, ADP employment
  • ETFs: XLE, LQD, JNK, IEF, SH
  • Companies referenced: Nvidia, Microsoft, Salesforce, ServiceNow, Walmart, Costco, Altria, Verizon, JP Morgan, Duke Energy, Kinder Morgan, Berkshire Hathaway, BlackRock