For most of the stock market’s history, investing was mainly about picking individual stocks and bonds. Over recent decades, however, large-scale economic events have played a growing role in shaping markets. Major developments, whether involving central bank decisions, world politics, or global trade, now impact nearly all stocks, regardless of how any individual company is performing. For investors, this means that building a strong portfolio today is less about choosing the right stocks and more about deciding how to spread money across different types of investments in a way that matches your financial goals.
This has been especially true over the past year and a half, as two major forces have driven markets: the war in Iran and U.S. tariff policy. Tariffs are fees charged on imported goods from other countries. While these two issues are quite different, both affect the prices consumers pay and the demand businesses face, either directly through higher energy costs or indirectly through costlier imported goods. One important thing to understand about these kinds of large-scale events, though, is that their effects often fade with time. Because of this, investors are generally better served by keeping their focus on longer-term trends rather than reacting to any single event.
The war in the Middle East, gasoline prices, and OPEC
One of the most direct ways the conflict in Iran has affected American households is through gasoline prices. The national average for regular unleaded gasoline has risen to around $4.50 per gallon, which is well above the long-term average and a notable increase from just a few months ago. In some regions, prices have already surpassed $6 per gallon.1 Because energy costs are a key component of the Consumer Price Index (a common measure of inflation, or the rate at which prices rise), headline inflation has moved higher, making the economic picture more complicated after a period of improvement.
For some, this may bring back memories of the 1970s Arab Oil Embargo, when disruptions to oil supply caused prices to soar and led to gasoline rationing. However, the world looks quite different today. The U.S. is now the largest energy producer in the world, producing more than 13 million barrels of oil per day. This makes the U.S. economy less sensitive to disruptions in global oil supply.
Another important development is the recent decision by the United Arab Emirates (UAE) to leave OPEC, which stands for the Organization of the Petroleum Exporting Countries. For decades, OPEC members worked together to set global oil prices, mainly by agreeing on how much oil each country would produce. However, getting roughly a dozen countries to stick to agreed production limits has always been a challenge, and member countries have often produced more than their agreed amounts.
The UAE’s departure is a reminder that OPEC carries less influence than it once did, as member countries increasingly follow their own national interests. At its peak in the 1970s, OPEC supplied at least half of the world’s oil. Today, that share is closer to one-third.2 A broader group called OPEC+, which includes Russia and several other countries, was created to make up for this shift, but the same coordination difficulties remain.
While OPEC’s declining influence does not eliminate the risk of oil price spikes during times of geopolitical tension, it does mean that oil prices are less directly tied to OPEC’s decisions than they once were. This offers little relief to households feeling the pinch of higher gasoline prices, but it does help explain why the overall impact on financial markets has not been more severe.
Tariff policy continues to face legal challenges
The second major force shaping markets has been tariff policy, which has continued to face legal hurdles. In February, the Supreme Court ruled that tariffs put in place last April under the International Emergency Economic Powers Act (IEEPA) were illegal.3 In response, the administration moved to apply these tariffs under a different legal authority, known as Section 122 of the Trade Act of 1974. More recently, the U.S. Court of International Trade ruled that these Section 122 tariffs are also unlawful.4
On one side of the issue, the administration continues to pursue tariffs as an important part of its global strategy. There are other legal tools available, including Section 301 of the Trade Act of 1974, which allows for tariffs after investigations into specific countries’ trade practices. These investigations have already been launched against dozens of countries, suggesting that tariffs are likely to continue, though potentially in the form of rates targeted at specific countries.
On the other side, the process of refunding previously collected tariffs is now underway. Customs and Border Protection has begun reviewing refund requests, and some importers have already started receiving payments.5 Estimates suggest that total refunds could reach between $160 and $170 billion.
While the full amount and timing of these refunds is still unclear, any refunds that do occur could improve earnings and cash flow for the businesses that originally paid them. From a purely economic standpoint, this represents money that was taken away and is now being returned, so it is not truly a new gain. Even so, refunds are a positive development for businesses and consumers alike.
Markets have hit new all-time highs even amid ongoing uncertainty
For investors, global events can cause broad market indices and individual stocks to move based on factors that have little to do with how any specific company is actually performing. That said, another important feature of these types of events is that their effect on markets tends to diminish over time. News about wars, oil prices, tariffs, and other issues can create short-term swings in the market, but these are rarely the factors that determine where markets end up over the long run.
This is why, despite all the uncertainty of the past year and a half, the S&P 500 (a widely followed index that tracks 500 large U.S. companies) has still reached more than a dozen new all-time highs this year. As the accompanying chart shows, new all-time highs are a normal part of healthy, growing markets, even when there is no shortage of things for investors to worry about. What ultimately matters most is the broader backdrop of corporate earnings and economic growth, both of which have remained healthy.
The bottom line? Today’s market environment is shaped by global forces that tend to come and go. Staying invested with a well-constructed portfolio remains the best way to navigate uncertainty and achieve long-term financial goals.
References
1. https://gasprices.aaa.com
2. https://www.eia.gov/international/content/analysis/special_topics/Global_Surplus_Crude_Oil_Production_Capacity/full-report.pdf
3. https://www.congress.gov/crs-product/LSB11398
4. https://www.cit.uscourts.gov/sites/cit/files/26-47.pdf
5. https://www.cbp.gov/trade/programs-administration/trade-remedies/ieepa-duty-refunds
Index Description
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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