What are the best investments during geopolitical crises?

Historically, gold, U.S. Treasury bonds, and the U.S. dollar are the most reliable safe-haven assets during geopolitical crises. Defense stocks like Lockheed Martin and RTX also tend to outperform, particularly when crises trigger sustained increases in military spending. Energy stocks benefit when conflicts threaten oil supply routes.

How do oil prices respond to geopolitical events?

Oil prices typically spike rapidly during geopolitical escalations that threaten major supply routes or producing regions. The magnitude depends on the location — conflicts near the Strait of Hormuz (through which 21 million barrels per day flow) have the largest impact. Historical spikes range from 30-50% during major escalations, though prices often partially reverse as markets assess the actual supply disruption.

Why do Treasury yields fall during geopolitical crises?

Treasury yields fall (and bond prices rise) because institutional investors execute a 'flight to quality' — selling riskier assets like stocks and emerging market debt and buying U.S. government bonds, which are considered the safest assets in the world. This surge in demand pushes bond prices up and yields down.

How much of my portfolio should I allocate to geopolitical hedges?

Most financial advisors recommend 5-15% of a portfolio in geopolitically-sensitive assets as a structural hedge. This typically includes a permanent gold allocation (5-10%), a Treasury bond component, and potentially a small overweight to defense or energy stocks during periods of elevated geopolitical tension. The key is sizing positions for endurance rather than trying to time specific crises.

Do defense stocks fall when geopolitical tensions ease?

Unlike commodity spikes that reverse when tensions ease, defense stocks tend to hold their gains because military spending increases are 'sticky.' Once governments commit to multi-year rearmament programs — new weapons systems, troop expansions, base construction — those contracts generate revenue for 10-20 years regardless of whether the original geopolitical catalyst resolves.

Deep Dive: How Geopolitical Risk Affects Fin...

When missiles fly, markets move. From the 1973 Arab oil embargo that sent crude prices soaring 300% to Russia's 2022 invasion of Ukraine that triggered the worst European energy crisis in decades, geopolitical events have repeatedly demonstrated their power to reshape asset prices, sector leadership, and portfolio returns in ways that purely financial analysis cannot predict.

Yet for most investors, geopolitical risk remains the most underappreciated variable in their portfolio. While earnings reports and Fed decisions get exhaustive coverage, the mechanisms through which geopolitical tensions transmit into asset prices — oil supply disruptions, safe-haven capital flows, defense spending cycles, and currency realignments — are rarely discussed in practical, actionable terms. With U.S.-Iran nuclear talks entering their third round in Geneva, Russia deepening military ties with Cuba, and global defense budgets surging past $2.4 trillion, understanding these transmission channels has never been more relevant.

This guide breaks down exactly how geopolitical risk flows through financial markets, which assets historically benefit or suffer during periods of elevated tension, and how investors can position their portfolios to both protect against downside shocks and capitalize on the sectors that thrive when the world gets more dangerous.

The Four Channels of Geopolitical Transmission

Geopolitical events don't affect markets randomly — they flow through four predictable transmission channels, each with distinct asset-class implications.

1. Energy and commodity supply disruption is the most direct channel. Roughly 30% of global oil production flows through geopolitically sensitive chokepoints — the Strait of Hormuz (21 million barrels per day), the Suez Canal, and the Strait of Malacca. Any credible threat to these corridors immediately reprices energy futures. WTI crude currently trades at $66.36 per barrel, but historical precedent shows how quickly that can change: the 1990 Gulf War doubled oil prices in three months, and Russia's 2022 invasion pushed Brent above $130.

2. Safe-haven capital flows represent the flight-to-quality response. When geopolitical risk rises, capital migrates from equities and emerging markets toward U.S. Treasuries, gold, the Swiss franc, and the Japanese yen. The 10-year Treasury yield currently sits at 4.04%, and gold has surged past $5,200 per ounce — both reflecting elevated safe-haven demand in an environment of overlapping geopolitical tensions.

3. Defense and security spending cycles create durable multi-year tailwinds for aerospace and defense companies. Unlike commodity spikes (which reverse when tensions ease), defense budget increases tend to be sticky — once governments commit to rearmament programs, they rarely reverse course for 5-10 years. NATO's 2% GDP spending target, which only 11 of 31 members met in 2023, is now being raised to 3.5%.

4. Currency and trade flow disruption is the most diffuse channel. Sanctions, tariffs, and trade embargoes reshape currency valuations and trade routes. The U.S. Dollar Index (DTWEXBGS) at 117.99 reflects the dollar's continued role as the world's reserve currency — a status that amplifies its safe-haven premium during geopolitical crises.

Safe-Haven Assets: Gold, Treasuries, and the Flight to Quality

The safe-haven trade is the most reliable geopolitical response in financial markets, and understanding its mechanics is essential for portfolio protection.

Gold has been the definitive geopolitical hedge for millennia, and its current rally illustrates the pattern perfectly. Gold prices have climbed above $5,200 per ounce in February 2026, driven by a convergence of geopolitical tensions — U.S.-Iran nuclear brinkmanship, NATO rearmament, and central bank gold purchases exceeding 1,000 tonnes annually for three consecutive years. Historically, gold gains an average of 6-8% during major geopolitical escalations, though the effect is most pronounced when crises coincide with loose monetary policy.

U.S. Treasuries serve as the institutional safe haven of choice. During geopolitical shocks, large institutional investors rotate from equities into government bonds, pushing yields down and bond prices up. The 10-year yield's recent decline from 4.09% to 4.04% partly reflects this dynamic, as investors price in both recession risk from trade policy uncertainty and pure geopolitical hedging demand. The 2-year yield at 3.43% shows the curve remains positively sloped — a normalization that itself reflects changing expectations about Fed policy amid geopolitical uncertainty.

U.S. Treasury 10-Year Yield (Feb 2026)

The U.S. dollar typically strengthens during geopolitical crises, even when the U.S. is directly involved in the conflict. This paradox exists because global trade is denominated in dollars, and foreign entities need dollars to settle transactions during periods of market stress. The dollar's safe-haven premium compounds with Treasury demand — foreign investors buying U.S. bonds simultaneously bid up the dollar.

Oil Price Shocks: The Economic Weapon of Geopolitics

Oil remains the single most geopolitically sensitive commodity, and its price movements during crises create cascading effects across every sector of the economy.

The current geopolitical backdrop offers a useful case study. WTI crude has traded between $62.53 and $66.69 over the past two weeks, reflecting a market balancing conflicting signals: U.S.-Iran tensions threaten Strait of Hormuz flows (bullish for oil), while slowing global growth and abundant U.S. shale production act as a ceiling. If Iran nuclear talks collapse and military action materializes, historical precedent suggests oil could spike 30-50% within weeks.

WTI Crude Oil Price (Feb 2026)

Energy companies are the most direct beneficiaries of geopolitical oil spikes. Exxon Mobil (XOM) trades at $148.55 with a P/E of 22.17 and a $626 billion market capitalization — a stock that's rallied over 50% from its 52-week low of $97.80, partly reflecting elevated geopolitical risk premiums in energy. Chevron (CVX) at $184.09 with a P/E of 27.72 sits near its 52-week high of $187.90, similarly benefiting from the geopolitical bid under oil prices.

But oil price shocks cut both ways. For consumers and non-energy businesses, higher oil prices function as a tax on economic activity. Every $10 increase in crude oil prices typically reduces U.S. GDP growth by approximately 0.1-0.2 percentage points and adds roughly 0.4% to headline CPI inflation — the January 2026 CPI of 326.588 already reflects moderating but persistent inflationary pressures. This is why oil shocks can paradoxically hurt the broader stock market even as energy stocks surge.

Defense Stocks: The Multi-Year Beneficiaries of Global Rearmament

While commodity spikes tend to be temporary, defense spending increases triggered by geopolitical events create sustained multi-year investment cycles that rank among the most predictable secular trends in equity markets.

The current rearmament cycle illustrates this dynamic perfectly. Lockheed Martin (LMT) trades at $641.62 — up 56% from its 52-week low of $410.11 — with a P/E ratio of 29.84 and a market capitalization of $148.5 billion. RTX Corporation (RTX) has surged to $197.58, up 76% from its 52-week low of $112.27, commanding a P/E of 39.83 and a $265.2 billion market cap. These aren't speculative trades — they reflect genuine, contracted revenue growth as NATO allies race to meet new spending targets.

Defense Stock Performance: 52-Week Range

The defense spending cycle differs from other geopolitical trades in three important ways. First, contracts are multi-year — a new fighter jet program or missile defense system generates revenue for 10-20 years. Once a geopolitical catalyst triggers increased defense budgets, the revenue stream persists long after the immediate crisis fades. Second, barriers to entry are enormous — only a handful of companies can build advanced military systems, creating oligopolistic pricing power. Third, budget increases are politically sticky — cutting defense spending is politically toxic in most democracies, meaning increases driven by geopolitical events rarely reverse quickly.

For investors, this means defense stocks behave less like cyclical plays on geopolitical sentiment and more like secular growth stories during periods of rising global tension — which is exactly what the market is pricing today.

Building a Geopolitical Risk Framework for Your Portfolio

Understanding geopolitical risk is valuable; translating it into portfolio decisions is essential. Here is a practical framework for incorporating geopolitical analysis into investment decisions without overreacting to headlines.

Assess the supply-chain exposure. The most important question isn't "how scary is this crisis" but "does this crisis threaten a physical supply chain that matters to the global economy?" Conflicts near oil chokepoints, semiconductor manufacturing hubs (Taiwan), or critical mineral sources (rare earths, lithium) have far greater market impact than conflicts in regions without strategic commodity significance. The U.S.-Iran standoff matters because Iran borders the Strait of Hormuz; the Russia-Cuba military cooperation matters less for direct economic impact.

Diversify across transmission channels. Don't concentrate your geopolitical hedge in a single asset. A portfolio that holds gold (commodity hedge), Treasury bonds or Treasury ETFs (flight-to-quality), defense stocks (spending cycle beneficiary), and energy companies (supply disruption beneficiary) captures upside from multiple geopolitical transmission channels simultaneously. With the Fed funds rate at 3.64% and declining, the fixed-income component of this hedge also benefits from the rate-cutting cycle.

Distinguish between escalation and resolution. Markets price geopolitical risk asymmetrically: escalation happens suddenly (sharp sell-offs, commodity spikes), while resolution happens gradually (slow normalization). This asymmetry means the best time to add geopolitical hedges is during calm periods — not after a crisis is already in the headlines. By the time U.S.-Iran tensions are front-page news, defense stocks like LMT and RTX have already priced in much of the upside.

Size positions for endurance, not prediction. No one can reliably predict whether a geopolitical crisis will escalate or resolve. Allocate 5-15% of your portfolio to geopolitically-sensitive positions as a structural hedge, not a tactical bet. Gold and Treasury allocations should be permanent portfolio features; defense and energy overweights can be adjusted based on the geopolitical cycle.

Conclusion

Geopolitical risk is not a binary event to be predicted — it is a persistent feature of global markets that flows through identifiable channels: energy supply disruption, safe-haven capital flows, defense spending cycles, and currency realignment. Each channel affects different asset classes in predictable ways, and investors who understand these mechanisms can build portfolios that are resilient to geopolitical shocks rather than vulnerable to them.

The current environment underscores this framework's relevance. With U.S.-Iran nuclear talks at a critical juncture, NATO defense spending accelerating, gold above $5,200, and oil prices reflecting a persistent geopolitical risk premium, the transmission channels described in this article are all active simultaneously. Defense stocks like Lockheed Martin and RTX near 52-week highs, energy majors like Exxon and Chevron at elevated valuations, and Treasury yields reflecting flight-to-quality demand all demonstrate how geopolitical forces shape asset prices in real time.

The investors who consistently outperform during geopolitical volatility are not those who predict crises — they are those who build portfolios structured to benefit from the predictable market responses that crises trigger. Whether the next shock comes from the Middle East, the Taiwan Strait, or a region no one is currently watching, the transmission channels remain the same.

Frequently Asked Questions

Sources & References

FRED: 10-Year Treasury Constant Maturity Rate

fred.stlouisfed.org

FRED: Crude Oil Prices (WTI)

fred.stlouisfed.org

FRED: Federal Funds Effective Rate

fred.stlouisfed.org

FRED: Consumer Price Index for All Urban Consumers

fred.stlouisfed.org

Financial Modeling Prep: LMT, RTX, XOM, CVX Market Data

financialmodelingprep.com

Deep Dive: How Geopolitical Risk Affects Financial Markets — Safe Havens, Defense Spending, and Oil Price Shocks

Key Takeaways

The Four Channels of Geopolitical Transmission

Safe-Haven Assets: Gold, Treasuries, and the Flight to Quality

U.S. Treasury 10-Year Yield (Feb 2026)

Oil Price Shocks: The Economic Weapon of Geopolitics

WTI Crude Oil Price (Feb 2026)

Defense Stocks: The Multi-Year Beneficiaries of Global Rearmament

Defense Stock Performance: 52-Week Range

Building a Geopolitical Risk Framework for Your Portfolio

Conclusion

Frequently Asked Questions

Sources & References

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