Opportunity Lives in Chaos

In his epic treatise on strategy and mindset, “The Art of War,” Sun Tzu famously wrote: “In the midst of chaos, there is also opportunity.” Well, the chaos of war is here, and in the midst of a market trying to price in the recent bellicosity, opportunity lives.

Before we get to said opportunity, I want to share a few of my thoughts on the war with Iran, and in doing so, I will borrow from what I told my Forecasts & Strategies readers in our Monday hotline.

I am not a fan of war. And as someone who decades ago raised his right hand and swore an oath to protect and defend the Constitution as a member of the U.S. Army, I don’t take war or military action lightly.

Yet sometimes, war is necessary.

In the case of Iran, not only do I think war is necessary, but it is decades overdue.

The Islamic theocracy kills its own citizens, sponsors terrorism through its proxies all around the globe, promotes and funds radical Islamic teachings and even suborned the attempted murder of my friend, author Salman Rushdie, for the “crime” of writing a novel.

These are reasons alone to wage armed conflict on Iran, but the real reason, as President Trump correctly said, is that Iran must not be allowed to acquire and/or produce a nuclear weapon.

Islamic theocrats in control of apocalyptic weaponry are antithetical to the survival of the human species, full stop.

Stymieing this situation now is in the interest of the entire free world, and that’s why the actions taken over the weekend are, in my view, both justified and laudable.

Of course, actions have consequences, and one such consequence is a whole lot of geopolitical and market anxiety due to fear and uncertainty. And as you are likely well aware, the preeminent enemy of financial markets is uncertainty.

Yet here is something I think you’ll be relieved to hear: unless the situation significantly deteriorates, I do not expect it to be a material influence on stocks.

Already, we’ve seen markets undergo intraday volatility, as Monday and Tuesday morning stocks sold off hard in reaction to the Iran war headlines. On Monday, however, stocks recovered from the early selloff throughout the day, so much so that the S&P 500 Index was actually slightly positive at the closing bell.

Tuesday saw some deeper selling on fears the war could continue for longer than originally thought, and on news that the Strait of Hormuz was effectively closed. Considering that about 20% of the world’s oil supply flows through this key waterway, the closure sent oil prices surging. Yet by the end of the session, stocks had recovered much of their early losses, with the S&P 500 down approximately 1% at the close.

In early Wednesday trade, the S&P 500 had already recaptured nearly all of the Tuesday selling, so as we’ve seen, the chaos factor is indeed there, but traders also see the opportunity.

But what happens if there is a protracted downturn in stocks prompted by a materially negative degradation of the conflict in Iran? Well, there is opportunity here, too.

I always like to say that money goes to where it is treated best, and if the market is such where a more defensive posture is required, then that’s the posture smart investors should adopt. To do just that, here are a few of my favorite places where opportunity lives in chaos.

Perhaps the most obvious place where opportunity lives in chaos is in oil and energy stocks. If the war keeps oil prices higher, then stocks tied to oil’s fortunes are likely to spill over profits to shareholders.

Funds such as the State Street SPDR S&P Oil and Gas Exploration & Production ETF (XOP), VanEck Oil Services ETF (OIH) and State Street Energy Select Sector SPDR ETF (XLE) are the logical, and simplest, ways to gain exposure to the rising oil prices thesis.

Next up is what I call the “weapons replenishment cycle” trade. I’ve already read multiple reports expressing concerns over dwindling missile, drone and drone interceptor inventory. The longer this conflict goes on, the greater and more urgent the weapons replenishment cycle will become.

Funds such as the iShares U.S. Aerospace and Defense ETF (ITA) and Global X Defense Tech ETF (SHLD) are two standout ways to gain replenishment cycle exposure, as are individual stocks such as Lockheed Martin (LMT) and RTX Corp (RTX).

If we were to see the current war in Iran generate a persistent and material fear bid that plagues the market with chaos and uncertainty (and I certainly hope we won’t), then these two segments are among the most-logical places to move to where opportunity lives.

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Sun Tzu was Self-Aware

“You are responsible for the good and bad in your life.”

–Sun Tzu

As I wrote in our lead story, Sun Tzu’s, “The Art of War” is perhaps the best treatise on strategy and mindset for military leaders ever written. Yet what you might not know is that Sun Tzu was also a thinker who expressed the importance of self-awareness, and the role it plays in our lives. The simple, yet profound, observation here that we are all responsible for both the good and bad in our lives should be common sense, but it’s not. How many times have you heard that a person is just a “victim of circumstance”?

To be certain, luck plays a major role in all of our lives. Yet how you deal with good and bad luck (because we all get plenty of both) is your responsibility, and accepting this truth is the first splash into the lake of wisdom.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods