What War Would Mean for Wall Street

Nearly 20 years after 9/11, NYC's financial district is no stranger to war -- or the need to have an investing plan should things go hot again.
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First off, a little history. The financial district at the southern end of the Manhattan borough of New York City is no stranger to war. This has nothing to do with business, nor economics, unfortunately. 

Quite simply, it was we who were targeted in September of 2001, and before that, on a smaller scale, in February of 1993. We know what an earthquake feels like. We know what it feels like to lose a race run against a booming cloud of construction material.

It was our friends and acquaintances who were killed on the first day of The War on Terror. We were the ones making our way through the darkness, through the rubble, and ripping our clothes apart in to craft makeshift gas masks, trying to stay with, or locate, "our" people. I will refrain from getting graphic, but some sights, some sounds, and worst of all, that smell, just stay in your head forever. I wish I had not made myself think of that smell. I had never wanted to remember that smell again.

Then, the first responders worked on "The Pile," trying to find survivors. We had to get the nation open for business, even if we couldn't breathe -- for months. We felt it was our duty to our country. Most of us have been diagnosed with something. Many are now dead. Me? I was diagnosed with cement inhalation that December. Ever wonder why I am such a fitness fanatic at such an advanced age? It's me vs. my lungs, probably till the end. 

It took us four business days to get markets open for business -- and the event probably rushed along the change in the market model that would be experienced over the following years.

President Donald J. Trump, Jan. 8, 2020

I think it's most important now to focus on the fact that Iranian forces completely missed their targets on Tuesday evening, perhaps intentionally, as a face-saving move, in the wake of the death of Gen. Qassim Suleimani Friday morning. It is important to note that this particular officer was a military target operating in a foreign country, thought to be acting in an offensive capacity against U.S. forces at the time of his death.

President Trump did not act rashly on Tuesday evening. He waited for a battle damage assessment, which is to be applauded, as the impulse had to be to act in defense of U.S. personnel on the ground. As the president did not act, the regime in Iran, for now, appears to be standing down. Does it stop there? Just in 2019 alone, Iran or Iranian-backed proxies have attacked oil tankers in the Persian Gulf, have shot down a U.S. drone, have seized a U.K.-flagged vessel of commerce, have attacked Saudi oil production infrastructure, and have attacked U.S. military bases in Iraq. Again, just in 2019. Go back years, and the list is endless, as well as lethal.

For now, cooler heads have prevailed. I hope that traders and investors can go back to worrying about quarterly earnings, monetary policy, the federal budget, trade with China and the coming national election. That said, are you going to trust this calm? The idea is to always hedge a portion of one's portfolio against a market shock, and to do it ahead of time. Once the horses have left the barn, well, quite simply, they are then down the street and you can't catch them. As some recently inflated prices for haven assets return to whence they have come, perhaps investors should consider levels at which entry might be made.

What If...

Confining this article to a potential war with a regional power such as Iran in the Middle East, there are four levels of escalation that events could pass through. The first and probably omnipresent level would by cyber warfare. Of course, this type of warfare can escalate to include utilities, food supplies and military weapons systems, but at least on the level of espionage, this type of warfare is very likely ongoing at all times.

The second level is one of regional harassment that disrupts the normal flow of commerce to gain short-term advantage, say in energy prices or leverage in expected negotiations. The third level results in a protracted conventional war.

The fourth level -- which I hope to never see -- would be a mistake that has a nuclear result.

In all cases, a wise investor will already have a cash balance on hand. I usually suggest 20% to 25% minimum for retail investors, but this is personal, and it's really a comfort-level thing. If you can't sleep at night, raise cash. Don't worry about a suggested level you heard from a guy like me. I think it's important that investors hold between 5% and 10% of their investing wealth in gold, with the first 5% in physical gold. Up to 5% of the rest can be held in paper gold as a means toward manipulating exposure size. Remember to not store the physical bullion in the same place. Some here in the U.S., some elsewhere. Paper gold may or may not be accessible when you need it. What if the electric grid has been destroyed?

I am well known for trading energy names, and they do pop nicely at times like this, but the gains never seem to hold. The reason one is in these names is the dividend yield. I like large-caps headquartered outside of the U.S. wartime protection, think BP Plc. (BP) - Get Report, and Royal Dutch Shell (RDS.A) - Get Report. As for defense names, I have long relied on Lockheed Martin (LMT) - Get Report, and still do, despite how well that name has performed. I also, fortunately, doubled my stake in Kratos Defense and Security Solutions (KTOS) - Get Report just last week. For those not in the know, this is a high end manufacturer of military drones also working on hypersonic weaponry. I like the Raytheon (RTN) - Get Report side of the Raytheon-United Technologies (UTX) - Get Report merger at this point, but I am still long UTX. Both Northrop Grumman (NOC) - Get Report and L3Harris (LHX) - Get Report appear to be near points on their daily charts that could provide fuel for the acceleration of a breakout already in progress.

Stephen “Sarge” Guilfoyle writes on stocks and the markets each trading day for Real Money, TheStreet’s premium site, including his popular Market Recon column every morning. Guilfoyle is also co-portfolio manager of TheStreet’s Stocks Under $10.

At the time of publication, Guilfoyle was long BP, RDS.A, LMT, KTOS, UTX equity. Short BP calls. Short KTOS calls.