Another War

Markets sold off this week as war in Iran continued into its sixth day and Iran threatened to close the straight of Hormuz, sending oil prices higher. As we have said in the past, war is not necessarily a major issue in stock markets. When Russia invaded Ukraine in 2022 major stock markets basically shrugged off the attack. Similarly, the markets were surprisingly resilient during the last Israel – Iran conflict.  Global markets are diverse and robust, and while all wars clearly have a significant human toll, when it comes down to simply investing, some countries do not have a significant economic impact.  Conflicts in the middle east in contrast, tend to impact markets more significantly when they impact the flow of oil, the key energy source for the global economy.

As of this writing Iran has been able to achieve a de-facto block of the straight of Hormuz, one of the worlds most critical energy chokepoints through which approximately 20% of the world’s oil flows. It is a de-facto blockade since oil tankers are refusing to go through the straight simply on the threat of Iranian attack. As a result, Oil rose from $62 per barrel before the war to $92 per barrel on Friday.

Oil impacts just about everything in the global economy: transportation costs, production costs, energy costs, even food production. As oil goes higher, markets are concerned that it could increase inflation, erode profits, and derail the global economy. It is critically important to get the oil flowing again.

Thankfully, the US is also a major producer of oil, so the US economy has a better chance of weathering the storm. Other major economies, such as China, Japan, and Europe, are major oil importers and the sudden rise in the price of oil will more significantly impact these markets.

The markets could continue to sell off if the war drags on but are also likely to recover quickly if and when the conflict is over or oil starts flowing.  With the benefit of hindsight, we can see that many similar conflicts have represented buying opportunities. Therefore, we continue to believe that it is best to rely on long-term strategy instead of reacting to the daily news of what is happening in the war.