The war between Israel and Iran has gotten worldwide attention and made financial markets uncertain. Israeli attacks on Iranian nuclear sites and military bases started on June 13 and quickly caused Iran to fight back. Then, on June 21, the U.S. attacked Iran’s nuclear facilities. The situation is still changing and can shift quickly, and there are many different opinions on what Iran might do next. This is happening while the Israel-Gaza war continues, and other regional wars are going on in different parts of the world.
While the human cost is the most important thing to think about, investors also need to understand how these events affect markets. Perhaps the biggest worry among investors is whether events like these could grow into full-scale global wars, especially now that the U.S. is directly involved. While this is always possible, recent history does not suggest this will happen. Instead, even serious wars, including Russia’s attack on Ukraine, Hamas’s attack on Israel, and the war in Afghanistan, stayed limited, causing only short-term stock market ups and downs.
This is not to make these wars seem less serious, but to remind ourselves that overreacting to these events with our investment portfolios can hurt us. In times like these, it’s more important than ever to keep perspective and focus on the lessons of history and long-term market trends. What should investors focus on in this environment to stay disciplined in these markets?
Middle East tensions have gotten worse
The latest events show an increase in Middle East instability. Israeli forces targeted Iranian nuclear sites and military leadership, with reports showing damage to uranium conversion facilities. In response, Iran has attacked back with missiles and drones, with some reaching Israeli territory. The U.S. then bombed the three key nuclear sites of Fordo, Natanz, and Isfahan. The war has also damaged important infrastructure in both Israel and Iran, including natural gas facilities and oil refineries.
At the risk of making things too simple, historians tend to view every event as unique, with its own story, causes, and results. Economists, on the other hand, tend to look for patterns and similarities between events to draw broad conclusions. As investors, both perspectives are important to understand what lessons do and do not apply. After all, a common saying is that history doesn’t repeat itself, but it often rhymes.
The chart that goes with this article provides some historical perspective on geopolitical events over the past 25 years. This includes wars in the Middle East that affected oil prices, such as the Iranian drone strikes against Saudi Arabia in 2019. These periods show that while there can be market swings in the short term, markets have typically recovered from geopolitical shocks, often within weeks or months of the initial event. What mattered more during these periods were the underlying business cycle trends.
Oil prices have been up and down
In the short run, oil prices can act as a way that regional wars impact the rest of the world. The immediate market reaction to the latest war focused on energy markets, with Brent crude futures rising above $74 per barrel. Oil prices remain volatile but fell back toward $70 per barrel on a possible cooling down of tensions.
Oil prices affect the global economy since they are still a significant ingredient in all products and services. Higher oil prices lead to more expensive gasoline and transportation costs, raising prices for everyday consumers and businesses. This is made worse by the possible closure of important shipping lanes, including the Strait of Hormuz in the Persian Gulf. This strait is a critical waterway through which approximately 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 war, 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 a significant domestic supply helps to protect the U.S. economy and financial markets.
How wars affect portfolios depends on business cycles
For investors worried about growing wars around the world, taking a step back can help provide perspective. From World War II to the Iraq War, markets may have reacted to these wars in the short run, but were driven by investment fundamentals 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 push the economy forward 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 (a period when prices rise but the economy doesn’t grow), resulting in poor market performance.
Again, none of this is to make light of the human and social consequences of these wars. For the current situation, much will depend on whether the war expands further or begins to cool down. The involvement of major powers and threats to critical supply routes add complexity, but history suggests that even significant regional wars tend to have limited long-term impact on global financial markets.
The bottom line? While Middle East tensions have created short-term market volatility, investors should keep perspective and avoid overreacting to headlines. A portfolio that matches long-term financial goals remains the best approach for getting through periods of geopolitical uncertainty.