Citadel's Ken Griffin Says a Six to Twelve Month Strait Closure Makes Global Recession Unavoidable. Here Is What That Risk Means for Your Portfolio

The U.S. and Israel's war with Iran has been a substantial source of market volatility since it kicked off at the end of February. In response to the conflict, Iran moved to close the Strait of Hormuz -- a shipping channel through which between 20% and 25% of global oil shipments are estimated to pass through. Citadel CEO Ken Griffin recently weighed in on the potential implications of the Strait of Hormuz remaining closed for a sustained period of time, and his comments are eye-catching.

Citadel is widely held to be the most successful hedge fund in history, so many investors take note when Ken Griffin makes investment moves or weighs in with market commentary. Speaking yesterday, Griffin said that the world is looking at a global recession if the Strait of Hormuz remains closed for the next six to 12 months. If the shipping channel remains closed for that duration, Griffin believes that a global recession is unavoidable -- and he's likely correct.

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How should investors react to Iran risks?

Griffin's statements about a global recession being unavoidable if the Strait of Hormuz continues to remain closed don't look like hyperbole. Oil prices have already surged in response to the shipping disruption, and continued elevation of energy prices can be expected to have a significant adverse impact on the worldwide economy.

On the other hand, that doesn't mean that investors should overreact to the threat. Major stock market indexes have rebounded to near the levels of record highs on hopes that the conflict could draw down in the near future, and recent comments from President Donald Trump appear to signal a desire to get peace negotiations done.

In an interview broadcast today, President Trump said he thinks that the Iran war is "very close to over." He also indicated that he thinks that negotiations on a peace deal will resume this week.

Trump announced last week that the U.S. had agreed to a two-week ceasefire with Iran that would reopen the Strait of Hormuz and allow for negotiations to end the conflict, but talks broke down over the weekend. The U.S. has since been blockading Iranian ports, adding pressure to get a deal done.

The situation is high risk, but don't panic

While the threat that a drawn-out war with Iran could create a global recession is a real risk that can't be discounted, investors shouldn't respond by panicking. With stocks having recovered from most of their losses connected to the war, it makes sense to take a cautious approach to new purchases as geopolitical dynamics continue to evolve -- but the market currently seems to be betting that the situation can be resolved in the not-too-distant future.

On the other hand, some stocks could actually be poised to benefit if the Strait of Hormuz remains closed. In particular, Griffin noted that he thinks the world will see a massive shift toward the consumption of alternative fuel sources like nuclear, wind, and solar if that plays out -- so high-quality companies in those categories could be worthwhile defensive plays right now.

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