• The conflict in the Middle East has broad global ramifications – including negative consequences for retirement savings
• The war can cause higher inflation, recession, and stock market volatility
• A Gold IRA can protect retirement funds from the consequences of Middle East war

Market Drops as Middle East War Escalates

The Dow posted its biggest weekly loss since March 2023 in the run up to the Iranian strike on Israel. The DJIA cemented its longest losing streak in 10 months. The market dropped on fears of growing escalation between the two countries. Now investors are anxiously awaiting Israel’s response to Iran’s launch of more than 300 missiles and drones at them. The conflict half a world away holds serious implications for retirement funds for several reasons.¹

Oil

Experts expect highly volatile oil trading soon. They are finding themselves in uncharted territory with a direct conflict between Iran and Israel. The Middle East accounts for roughly a third of global oil production. In addition, the Strait of Hormuz sees almost 20% of global oil supply and a significant amount of all shipping volumes. Iran’s geographic proximity to the channel poses a risk of immobilizing supply with a global impact.

The shifting alliances amongst OPEC producers is also adding to the uncertainty. Those nations are wavering between national interests against Iran and economic interests to keep oil prices stable. The managing director of Velandera Energy Partners said, “If Israel vows to respond back with greater force, or Iran basks in solidarity with the Arab neighbors, then there is a real potential for oil’s march to $100.” Chase Bank said oil could potentially hit $125 per barrel.²

Inflation reduces the purchasing power of retirees’ savings. Rising oil prices can increase inflation because it’s an essential part in the production and transportation of goods and services. When oil prices rise, businesses face higher energy costs. This often leads to increased production costs. These increased costs are commonly passed on to consumers. Higher prices result, contributing to inflation. Additionally, higher energy costs can lead to increased expenses for businesses. Economic downturns or recessions can result, negatively affecting investment returns and retirement savings.

Conditions aren’t exactly the same today as they were in the 1970s, but a bad historical precedent exists. During the 1973 oil crisis, sparked by the Yom Kippur War, the S&P 500 index dropped by nearly 50%. OPEC’s oil embargo led to quadrupled oil prices and an economic recession. Similarly, the 1979 energy crisis, triggered by political unrest in Iran, saw the S&P 500 index fall by over 27%. The drop reflected disruptions in oil supply and heightened economic uncertainty.³

Interest Rates

Rising Middle East tensions could cause the Federal Reserve to adopt a more cautious approach to cutting interest rates. Wall Street has pushed back expectations for an interest rate cut to September from March. But if high oil prices push up inflation, then those cuts are likely to get delayed further. The Fed has said they are making their decisions as data comes in. If inflation isn’t trending to their 2% goal, they won’t cut rates. There is already talk of no rate cuts this year as inflation has started increasing again.

Higher-for-longer interest rates can harm retirement funds by lowering the value of existing bonds and fixed-income investments, as newer bonds offer higher yields. Additionally, high rates can make borrowing more expensive. Thereby reducing consumer spending and potentially slowing economic growth, which can negatively affect investment returns in retirement portfolios.

Trader and investors must now factor in the higher threat of stagflation in the global economy with the Middle East crisis driving up inflation and slowing growth. They must do this at a time when fiscal policy and monetary measures are already losing their effectiveness in taming inflation.

Gold and Silver

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The chaotic international crisis may present an opportunity to buy gold and silver at lower prices according to Peter Spina of goldseek.com. He believes a major market selloff could bleed over to precious metals. A selloff can cause investors to sell their precious metals holdings to cover their losses. The sudden influx of supply could create a temporary drop in prices.

But that drop wouldn’t last long. Gold prices rallied to yet another record high last Monday. Gold’s recent rapid price increase is predicted to only accelerate with the increased war tensions. Spina continued, “The gold price is reflecting all sorts of problems, risks, and now the fear-war premium will likely be added should there be no quick de-escalation to these very serious events in the Middle East.”⁵

Conclusion

The conflict in the Middle East is having broad global ramifications. Included in them is a potentially serious negative impact on retirement savings due to inflation, recession, and market volatility. Gold’s upward trajectory reflects a universal sprint towards to economic security. Before the war heats up more, now is a good time to learn how physical precious metals can protect the value of your nest egg. Contact American Hartford Gold at 800-462-0071 to find out how a Gold IRA can help secure your financial future.

Notes:

1. https://www.marketwatch.com/livecoverage/stock-market-today-dow-futures-climb-after-iran-attack-on-israel-causes-little-damage
2. https://www.marketwatch.com/livecoverage/iran-attacks-israel-live-coverage-of-events-and-markets-reaction
3. https://thehill.com/opinion/international/4270641-the-global-impacts-of-todays-war-in-israel-are-not-the-same-as-1973/#:~:text=The%20S%26P%20500%20index%20plunged,its%20low%20in%20September%201974.
4. https://www.americanhartfordgold.com/gold-price-charts/
5. https://www.marketwatch.com/livecoverage/iran-attacks-israel-live-coverage-of-events-and-markets-reaction

 

• Inflation continued to rise according to the most recent Labor Department Report 
• Inflation is eating away at the value of retirement plans, eroding more tan 10% of value during 2022 and 2023 
• Gold is proving itself a hedge against inflation and continues to break all-time highs 

Inflation Continues to Rise

The Labor Department’s most recent CPI report painted a grim picture. Higher than expected prices showed that inflation is more stubborn than thought. The stock market immediately dipped upon the news as hopes for interest rates cuts were dashed. Retirement savers are facing a precarious new reality as we seem to be entering a ‘no-landing’ state of permanent inflation.

Overall inflation and core inflation, with volatile food and energy costs removed, both remained well above the Fed’s 2% target. Headline CPI rose 3.5% from a year ago. That’s up considerably from February’s 3.2% rate. Core price inflation came in at 3.8%. Service prices were up 5.4% from last year. In effort to get a better picture of the economy, economists started the ‘supercore’ measurement. This new computation takes core services and subtracts housing. That number surged 7.2% at an annualized pace. ¹

²

Economists suspect the previous easing of inflation was due to falling oil prices. But gasoline prices rose again in March as OPEC+ extended supply cuts and the Middle East conflict grew.

Inflation and the Stock Market

Over the past few months, investors had high hopes for imminent rate cuts. The Fed had signaled the possibility of cutting interest rates three times this year. In January, the CME FedWatch Tool indicated a 73% chance of a 25-basis point rate cut by the Federal Reserve as early as March. This optimism fueled a stock market frenzy. With the release of this latest inflation report, that surge was brought to an abrupt halt.³

The Dow Jones Industrial Average fell more than 500 points. The Nasdaq and the S&P 500 also dropped. Tech stocks, including Microsoft, Amazon and Apple, were lower. The CME FedWatch Tool now show 78% of participants expect the Fed to hold rates steady in June. The markets are now hoping for a rate cut in September. Though there is now a possibility of no interest rate cuts this year – further stagnating the economy.⁴

Interest rates are also taking on a political overtone. Some economists point out that a well-timed cut could give a crucial boost to the economy when it comes voting time. Seema Shah is the chief global strategist at Principal Asset Management. She said, “Today’s crucial CPI print has likely sealed the fate for the June [Fed] meeting with a cut now very unlikely. Even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the US election will begin to intrude with Fed decision making.”⁵

Markets historically drop when interest rates are kept longer for higher. This is because it costs more for companies to borrow money and other investments may look better compared to stocks.

Inflation Impact

Continuing inflation is placing severe pressure on most US households. Prices have increased on everyday necessities. In the past few years, the cumulative consumer price index has increased a whopping 18.49%. ⁶

Lingering inflation is taking a heavy toll on retirement savings. The damage goes beyond falling portfolio value as stocks plummet. Warren Buffets said, “Inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital.”⁷

And the math bears it out. Let’s consider an IRA with $100,000 as an example. Just accounting for 8% inflation in 2022, and 4.1% in 2023, the account would have lost $11,772. More than 10% of your retirement savings would have vanished in two years. That money is going to continue disappearing as inflation remains elevated. In addition, higher-for-longer interest rates are likely to keep driving stock values down and increase the chance of recession.

Conclusion

So-called ‘sticky’ inflation presents a real threat to retirement savings. The economy is finding itself in a ‘no-landing’ situation. Continued growth and a tight labor market are working to prevent a decline in inflation. Meanwhile, the most aggressive interest rate hikes in decades haven’t stopped inflation. Instead, they have brought us to the brink of recession.

One stand out in this mess is gold. It is proving itself as a true hedge against inflation. As purchasing power continues its descent, the price of gold keeps breaking record highs. For those people who want to protect the value of their portfolios from the ravages of inflation, now is the time to investigate what gold can do for you. A Gold IRA is designed to maximize your protection from inflationary forces. Contact American Hartford Gold today at 800-462-0071 to learn more.

Notes:

1. https://www.foxbusiness.com/economy/march-inflartion-report-another-month-hot-price-gains-expected
2. https://www.foxbusiness.com/economy/march-inflartion-report-another-month-hot-price-gains-expected
3. https://www.cbsnews.com/news/interest-rates-today-mortgage-goldman-sachs/
4. https://www.foxbusiness.com/markets/stocks-sink-after-hot-march-inflation-data
5. https://www.cnn.com/2024/04/10/markets/markets-fall-cpi-inflation-report/index.html
6. https://www.foxbusiness.com/economy/march-inflartion-report-another-month-hot-price-gains-expected
7.https://www.goodreads.com/author/quotes/756.Warren_Buffett?page=5#:~:text=the%20arithmetic%20makes%20it%20plain,ability%20to%20simply%20consume%20capital.