The Three-Phase Conflict Trade: Why Most Investors Are Asking the Wrong Question

Oil is up. Defense stocks have moved. The headlines are loud. And most investors are doing one of two things right now, feeling relieved that they acted early, or feeling sick that they hesitated too long and already missed it.

Both reactions are pointing toward the wrong trade. And both are symptoms of being trapped in phase one of a pattern that has repeated itself, with remarkable consistency, across nearly every major geopolitical conflict of the last ninety years.

Understanding that pattern, where it starts, how it develops, and where the real money gets made, is the difference between chasing what has already moved and positioning for what has not moved yet.

What Markets Actually Care About

The first thing to understand about conflict investing is that markets are not making moral judgments. They do not care about who fired first, who is right, or what the historical grievances are. They care about one thing: money moving from one place to another. And for almost a century, every time a major conflict has started, that money has moved in the same sequence.

Not similar. The same.

The Gulf War began in August 1990. Oil spiked, defense stocks ran, and the S&P 500 rattled on initial fear. Everyone held their breath waiting for the economic fallout. Instead, the S&P delivered almost 12% annualized returns for the entire duration of the conflict. When the war ended, the market gained another 18% in the following twelve months.

The Iraq War in 2003 followed the same opening act: fear, oil move, defense move, and the market ran roughly 80% until the financial crisis arrived four years later.

Russia’s invasion of Ukraine in February 2022 produced a 7% drop in the S&P 500 in the first wave of panic selling, followed by a brief retracement and then a steady recovery.

Ninety years. Every major conflict. Three phases. Every time!

Phase One: The Emotional Phase

Phase one is the most expensive phase to act in, and it is exactly where most retail investors are right now.

It is the emotional phase. It is the phase where traders price in possibility rather than reality, where fear drives decisions faster than information justifies them, and where the trades that capture attention , oil, defense stocks, volatility, are being executed by people who are already late.

In the current conflict, oil initially rose because markets priced in the possibility of supply disruption through the Strait of Hormuz, the critical maritime passage through which approximately 20% of the world’s entire oil supply travels. Iran produces over 3 million barrels of oil per day, and when traders believe that chokepoint might be threatened, they act on fear before confirmation arrives. When actual supply disruption occurred, prices spiked further. But the movement has not been a steady directional trend, it has been volatile, bouncing sharply in both directions. That kind of movement is not a investable trend. It is noise with a price tag.

Defense stocks have already moved double digits since tensions first escalated. The phase one trades are done. They are crowded, they are expensive, and most retail investors who are still looking at those numbers trying to decide whether they missed something are asking exactly the wrong question.

The right question is not whether you missed phase one. The right question is where phase two is forming.

The Hidden Exposure Most Investors Don’t Know They Have

Before getting to phase two, there is something more important to address for the majority of investors: the conflict is already inside your portfolio, and you probably do not know it.

Consider a typical investor, call him Roger. He is 42, works in supply chain management, has about $65,000 split between a retirement account and a brokerage account, mostly index funds with a few individual stocks he picked up during COVID. He saw the oil headlines, shrugged, and figured the conflict had nothing to do with him. He has not bought oil futures. He has not bought defense stocks. He is watching from the sidelines.

Except he is not.

His index funds hold utility companies. They hold real estate investment trusts. They hold growth companies that borrowed heavily when interest rates were low and are now watching that debt become more expensive to carry. None of those positions were chosen because of the current conflict. But every single one of them is absorbing it through a mechanism that most people never trace back to its source.

Here is how the chain works: oil stays elevated, which keeps energy costs elevated across the economy, which keeps inflation above the Federal Reserve’s target, which prevents the Fed from cutting interest rates on the schedule that markets were pricing in. Higher rates for longer create a persistent headwind for interest-rate-sensitive assets: utilities, real estate investment trusts, highly leveraged growth companies. That headwind builds quietly and slowly, and then arrives all at once.

Roger has not sold anything. He has not panicked. He thinks he is watching this conflict from the sidelines. But it found him anyway.

This is what the buy oil videos never explain. The risk is not only in what you chase. It is in what you are already holding. Most everyday investors are more exposed to a sustained oil price environment than they realize, not through direct energy positions, but through the rate consequences that elevated oil prices quietly trigger throughout the rest of their portfolio.

Phase Two: The Repricing Phase

Phase two is where the pattern becomes investable, and it is where institutions move while retail investors are still watching oil bounce.

Panic fades. Emotion drains out. The market stops asking whether the world is ending and starts asking what actually changed. It maps the second-order effects: what does sustained elevated oil mean for inflation trajectories? What does that mean for central bank decisions? Which sectors just became more profitable in this environment, and which ones just became more vulnerable?

The large institutional funds, the ones that move markets rather than react to them, do not act on emotion and do not announce their positions. They rotate quietly before the confirmation arrives, before anyone on television tells retail investors it is happening. By the time phase two shows up in financial media, the positioning is largely done.

Here is the signal that phase two is already forming in the current environment: oil is up substantially. Energy stocks, the actual companies that produce and profit from elevated oil prices, are up single digits. Some have barely moved.

That gap is economically incoherent. When a commodity moves significantly, the businesses built around producing and selling that commodity should follow. They have not. That lag between commodity prices and the equity of commodity producers is not a warning sign. It is where the next significant move is sitting, waiting to be priced.

Bank of America conducted an analysis of ninety years of geopolitical shocks and found a consistent pattern in how different assets perform across the phases. In the immediate window (phase one), oil was historically the best performing asset, rising approximately 18% on average in the immediate aftermath of major conflicts. But six months out, oil had typically given back most of those gains. Oil spikes on fear and retreats when fear fades.

Gold behaved differently. Six months after those same geopolitical shocks, gold was still outperforming by approximately 19% on average, not because of the conflict itself, but because of what the conflict does to inflation expectations over a sustained period. The same mechanism that drives oil higher in phase one,  the threat of supply disruption, the inflationary consequences of sustained elevated energy prices, is the mechanism that keeps gold elevated long after the news cycle has moved on to the next story.

Most people buy gold after it has already moved significantly, because a television segment told them to. The investors who understand phase two are positioned before that segment runs.

The Shovels: Energy Infrastructure

There is a third category worth understanding that gets almost no attention in conflict coverage: energy infrastructure companies.

The concept comes from a well-worn investing principle about gold rushes. In a gold rush, the reliable way to make money is not to mine gold, it is to sell shovels to the miners. The shovel sellers make money regardless of whether any individual miner strikes it rich, because miners need shovels either way.

In an energy shock, the equivalent of shovels is energy infrastructure, pipelines, storage terminals, and the companies that move oil through the system. Companies like Kinder Morgan, Plains All American Pipeline, and TC Energy collect a toll on every barrel of oil that flows through their infrastructure. They do not need to predict where oil prices land. They need activity levels to remain elevated. Whether oil is at $70 or $90 per barrel, the same volume of product needs to move through the same pipes to reach the same destinations.

These companies are currently up low single digits since tensions escalated. Some have barely moved at all relative to what the elevated oil environment implies for their economics. That is not a warning sign about their prospects. That is phase two sitting in plain sight, waiting to be priced in by the institutional capital that has not yet rotated in.

Phase Three: Confirmation

Phase three is the rotation phase, when the market confirms publicly what phase two already established quietly. Winners become obvious. Money that was hiding in cash or defensively positioned assets finds its way toward the investments that benefited from the new environment. The narratives solidify. The analysis catches up to the price action that already happened.

By the time phase three appears on financial television, the positioning is done. The investors who benefited were not the ones who acted on phase three confirmation. They were the ones who recognized the phase two setup before the confirmation arrived.

The Right Questions to Ask Right Now

None of this means liquidating an existing portfolio and replacing it with energy infrastructure stocks and gold. That is just phase one thinking applied to phase two assets, chasing what the pattern suggests rather than building a position based on honest assessment of your current exposures and risk tolerance.

The productive approach is to audit what you are currently holding and ask two honest questions.

First: which of your current positions face a meaningful headwind if interest rates stay elevated for another six months? Utilities, real estate investment trusts, and companies carrying significant floating-rate debt are the obvious candidates. Understanding that exposure is not a reason to panic-sell those positions, it is a reason to understand what risk you are actually carrying and size it accordingly.

Second: which positions benefit from an energy environment that remains elevated, not necessarily spiking further, but staying elevated, over that same window? Energy infrastructure companies, gold, and the equity of energy producers that have not yet repriced to reflect current commodity economics are the obvious candidates for that question.

Those are the questions that phase two asks of a portfolio. They are different from the questions that phase one generates, oil up, defense up, should I buy or have I already missed it, and they are more likely to lead to durable returns rather than positions purchased at the peak of emotional fear-driven trading.

The Investors Who Come Out Ahead

The investors who came out of the Gulf War stronger were not the ones tracking troop movements or watching oil tick-by-tick. They were the ones tracking money flow, where institutional capital was moving before the headlines caught up to the rotation.

Right now, most people are watching oil bounce and waiting to see if the number goes higher before committing to a decision. Phase two does not wait for that decision. It forms in the things that no one is watching yet, the gap between commodity prices and the equity of companies that produce those commodities, the persistent inflation consequences that keep gold elevated long after the conflict itself fades from the news cycle, the infrastructure companies collecting tolls on every barrel that flows regardless of where the price lands.

The pattern has repeated for ninety years. The phases are the same. The only variable is whether you recognize where you are inside the sequence before the move has already happened, or whether you read about it afterward and wonder why you hesitated.