How Will the War Hit Your Wallet?

With any geopolitical crisis come questions of if and how activities in far-off lands could hit us financially back here in Philadelphia. The long answer is, well, nuanced; the simple one is that only time will tell. For more insight, we turned to local economists to share what history can teach us, why panic serves no one, and why putting your head in the sand for the next few months when it comes to your 401(k) actually may not be the worst idea.

Watch oil.

There’s a reason why the headlines are all leading with the price of oil this week. Energy is the tie that binds us all.

“Energy prices are one of the fastest ways that geopolitical tensions show up in the economy,” says Andrew Davis, director of macroeconomics research for Bryn Mawr Trust Advisors. “First you have higher oil prices, then raised transportation costs, and then eventually they could feed into inflation and, ultimately, consumer spending.” Davis explains that the reason experts focus so much on oil prices in some ways comes down to basic math: “A sustained $10 increase per barrel of oil adds roughly a quarter point to inflation, and reduces economic growth slightly.”

Kent Smetter, professor of business economics and public policy at Wharton, agrees that oil is the sector to watch right now. That said, he adds, “The U.S. is very different than it was in the 1970s” — our most famous major oil crisis — “in the sense that we’re now an exporter of oil.” We’re also a big producer of the equipment that’s used for oil production. (Think fracking.)

Still, if the crisis continues, the impact could compound: It’s one thing to skip spring break to avoid paying for overpriced airline tickets, it’s another for the tourism industry — or any other number of industries that ultimately have to pass on its higher costs of doing business — to take a hit en masse. “Short spikes tend to fade,” Davis says. “But it’s really those sustained increases in oil production that eventually push inflation higher and ultimately slow our economic growth.” So the real economic risk, he says, isn’t the headline news; it’s whether higher energy prices are here to stay or not.

Know your geography.

Remember back in third grade when you had to learn the difference between, say, an isthmus and a peninsula? And you asked: When will I ever need to know what an archipelago is? Well, here we are: You can’t understand the potential oil shortage without understanding the physical landscape shaping it.

The (geographic) heart of the matter comes down to a narrow strip of water — the Strait of Hormuz, just south of Iran. Matthew T. Kelly, associate dean of undergraduate programs for the Haub School of Business at St. Joseph’s University, where he’s also an assistant professor of practice finance and director of the Wall Street Trading Room, says something like 20 percent of the world’s oil supply has to travel through it — a risk tankers aren’t willing to take knowing they could get attacked. And there’s essentially no insurance policy big enough to protect it. “The U.S. is trying to figure out how to safely get oil tankers through,” Kelly explains. Military escorts, he says, are one option. In the meantime, we saw this week that the U.S. lifted some restrictions on Russian oil, meaning countries that would previously have been sanctioned for accepting Russian oil (as part of the pressure campaign on Russia during its own seemingly endless crisis with Ukraine … ) will not incur that penalty. “If there was not a strait there, if there was a wider passage, the impact would not nearly be what it is now,” Kelly says. “But right now, it’s a bottleneck — it’s like driving on the Schuylkill.”

Look to history.

For anyone who remembers those first few months of COVID (or any other number of crises past), this jolt to the market may feel familiar — and, in a way, comforting? “Geopolitical shock is temporary,” Kelly says. “It might not feel like it, but over the big picture, it’s temporary.” So, he and others say, “You don’t want to make any major portfolio decisions on breaking news. This happens with all shocks to the economy – in the beginning, when there’s so much unknown, that’s where all the volatility is gonna be.” But think about COVID, he says: Sure, there was a dip and a recovery, but “if you were able to sleep through two months and ignore your portfolio,” things then stabilized. So try your hardest not to panic. “Typically, retail investors” — meaning you and me — have the absolute worst timing.” The media coverage sends them panicking, they watch their investments tumble, and they can’t handle the emotions of it — and they sell at the lowest possible price, instead of riding things out.

Check in with your financial advisor.

That said, if you’re someone who hasn’t rebalanced your portfolio in 20 years — maybe you established a 401(k) with your employer when you were 45, and you’re now in your 60s and approaching retirement — let this be a wake-up call to reach out to your financial advisor to make sure you’re managing your risk in a way that aligns with your current age, circumstances, and retirement goals. “How many people really think about rebalancing their 401(k)?” Kelly says. “It falls off people’s minds until something happens.” The worst-case scenario, he says, is for something like the financial crisis of 2008/2009 to happen — people who thought they were about to retire found themselves down 30 to 40 percent. “This is nothing close to that,” Kelly says. But it is a great time to see where your risk is and how you might want to adjust it.

Sit tight.

“Thinking about the markets overall, they’ve shown over time that they’re remarkable in their ability to adapt,” Davis says reassuringly. “Periods of geopolitical uncertainty create this volatility in the short run, and it’s really easy to get wrapped up and have that weigh on your emotional decisions. But rarely do they change the long-term trajectory of the economy or the markets. It is rarely a good idea to abandon a plan just based on a political event.”

And whether you’re reading this in Rittenhouse or Delco, the Main Line or Manayunk, it’s a humbling moment to appreciate that as big as the planet may seem, our whole world really is interconnected, as is everything we’ve ever been taught. History, science, human behavior, math … this just may be the perfect case study in how it all comes together, and how it really is a small world after all.

This piece is part of a multi-year editorial series sponsored by WSFS Bank and Bryn Mawr Trust.

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