The fighting between Israel and Iran has gotten worldwide attention and made financial markets nervous. Israeli attacks on Iranian nuclear sites and military bases started on June 13 and quickly led to Iran fighting back. Then, on June 21, the U.S. attacked Iran’s nuclear facilities. The situation keeps changing quickly, and experts have many different opinions about what Iran might do next. This is happening while the Israel-Gaza war continues, and other regional fights are going on around the world.
While the human cost is the most important thing to think about, investors also need to understand how these events affect markets. The biggest worry among investors is whether events like these could grow into large worldwide wars, especially now that the U.S. is directly involved. While this could happen, recent history suggests it probably won’t. Instead, even serious conflicts like Russia’s invasion of Ukraine, Hamas’s attack on Israel, and the war in Afghanistan stayed limited, causing only short-term ups and downs in stock markets.
This doesn’t make these conflicts less serious, but it reminds us that making big changes to our investment portfolios because of these events can hurt us. During times like these, it’s extra important to keep perspective and focus on history’s lessons and long-term market patterns. What should investors focus on in this situation to stay disciplined?
Middle East tensions have gotten worse
The recent events show that Middle East instability is getting worse. Israeli forces attacked Iranian nuclear sites and military leaders, with reports showing damage to uranium processing facilities. Iran fought back with missile and drone attacks, with some reaching Israeli territory. The U.S. then bombed three important nuclear sites called Fordo, Natanz, and Isfahan. The conflict has also damaged important infrastructure in both Israel and Iran, including natural gas facilities and oil refineries.
To put it simply, historians tend to see every event as unique, with its own story, causes, and results. Economists, on the other hand, look for patterns and similarities between events to make broad conclusions. As investors, both views are important to understand what lessons do and don’t apply. After all, a common saying is that history doesn’t repeat itself, but it often rhymes.
The chart that goes with this article shows some historical perspective on political events over the past 25 years. This includes Middle East conflicts that affected oil prices, such as the Iranian drone strikes against Saudi Arabia in 2019. These time periods show that while markets can swing up and down in the short term, markets have typically recovered from political shocks, often within weeks or months of the initial event. What mattered more during these periods were the underlying business trends.
Oil prices have been jumping up and down
In the short run, oil prices can act as a way that regional conflicts impact the rest of the world. The immediate market reaction to the latest conflict focused on energy markets, with Brent crude futures (a type of oil contract) rising above $74 per barrel. Oil prices remain unstable but fell back toward $70 per barrel on possible de-escalation (conflict cooling down).
Oil prices affect the global economy since they are still an important input into all products and services. Higher oil prices lead to more expensive gasoline and transportation costs, raising prices for everyday consumers and businesses. This gets worse if important shipping lanes close, including the Strait of Hormuz in the Persian Gulf. This strait is a critical waterway through which about one-quarter of the world’s oil supply passes.
Still, it’s important to keep perspective on current oil price levels. While recent swings are notable, prices remain well below the peaks reached in 2022 during the early stages of the Russia-Ukraine conflict, when oil exceeded $120 per barrel. The current price level in the mid-$70s is within the range experienced over the past few years. Just this year alone, oil prices have moved between $60 and $82 per barrel.
It’s also important to note that the U.S. has become increasingly energy independent over the past two decades. American oil production now exceeds 13.5 million barrels per day. Some may find it surprising that the U.S. is the world’s largest producer of both oil and natural gas. While the U.S. still needs foreign oil and is sensitive to global oil prices, the fact that there is significant domestic supply helps protect the U.S. economy and financial markets.
How wars affect investment portfolios depends on business cycles
For investors worried about growing conflicts around the world, looking at the big picture can help provide perspective. From World War II to the Iraq War, markets may have reacted to these conflicts in the short run, but were driven by investment fundamentals (basic economic factors) in the long run.
For example, World War II jump-started industrial production after the Great Depression, and led to a significant shift in the labor market with women entering the workforce. These factors helped drive the economy through the rest of the century. Similarly, the Gulf War affected oil prices, but also happened at the same time as the Information Technology revolution of the 1990s. In contrast, the decade following the Vietnam War happened at the same time as high oil prices and stagflation (when prices rise but the economy doesn’t grow), resulting in poor market performance.
Again, none of this makes the human and social consequences of these wars less important. For the current situation, much will depend on whether the conflict grows bigger or begins to calm down. The involvement of major powers and threats to critical supply routes add complexity, but history suggests that even significant regional conflicts tend to have limited long-term impact on global financial markets.
The bottom line? While Middle East tensions have created short-term market ups and downs, investors should keep perspective and avoid overreacting to headlines. A portfolio aligned with long-term financial goals remains the best approach for navigating periods of political uncertainty.
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