Economic Impacts of The War in Iran – Where We’re At, What Could Be Ahead

This time around, the U.S. has some advantages that may reduce the conflict’s negative impact on the economy and financial markets. Unlike in the 1970s, when the U.S. relied heavily on imported oil, the country is now a net exporter of oil. The U.S. economy is also far less energy-intensive than it was during the first oil crisis that sent markets tumbling in the 1970s.

In uncertain markets like these, it can also be valuable to work with a seasoned financial advisor, like our team at WHZ, who can help to ensure investment portfolios remain diversified and positioned appropriately during both strong and challenging environments.

Stocks & the War in Iran

One of the toughest aspects of investing is staying the course when markets become volatile. Recently the market has faced its share of anxiety-producing headlines, and the war in Iran and its impact on oil markets has added to that uncertainty.

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Rising energy prices, concerns about inflation, and fears about the war’s economic impact have weighed on stocks. As of mid-March, the S&P 500 has fallen about 4% from its all-time high of 7,002.28 reached in January.

While every crisis is different, markets have endured wars and oil shocks before and ultimately recovered to new highs. Periods of uncertainty often reinforce the importance of maintaining diversified portfolios and avoiding emotionally driven investment decisions.

Energy Markets Take a Hit

Iran responded to U.S. and Israeli attacks by threatening to bomb ships passing through the Strait of Hormuz, a 21-mile-wide waterway between Iran and Oman. Traffic through the Strait has largely ground to a halt, disrupting exports of oil, natural gas, and fertilizer from producers across the Middle East.

Oil prices reacted quickly. The price of a barrel of oil in the U.S. jumped to about $101, up from roughly $67 before the conflict. Meanwhile, the nationwide average price of gasoline increased to about $3.58 per gallon, compared with roughly $2.94 before the attacks.

Governments have taken steps to soften the blow. The International Energy Agency announced plans to release 400 million barrels of oil from strategic reserves, and the U.S. temporarily waived sanctions on Russian crude exports. While these actions may help stabilize markets, they cannot fully offset the closure of the Strait of Hormuz, through which about 20% of the world’s oil supply normally flows.

Extended high energy prices present two major risks. First, they could push inflation higher as companies raise prices to offset rising costs. Airlines, for example, may increase ticket prices to cover higher fuel expenses.

Second, high fuel costs could slow economic growth or even trigger a recession. When consumers spend more on gasoline, they have less money available for discretionary purchases. Meanwhile, companies facing higher energy costs may delay hiring or reduce their workforce.

A Look at Past Wars

Historically, many conflicts in the Middle East have had only temporary effects on markets. For example, stock market weakness ahead of the Iraq War in 2003 reversed once the invasion began, and the S&P 500 finished the year up about 26%. Similarly, after an initial sell-off during the 1979 Iran hostage crisis, the S&P 500 rose 25.9% over the following 12 months.

There are exceptions. After the U.S. invasion of Afghanistan in 2001, the market fell 26.7% over the next 23 months, although much of that decline is attributed to the bursting of the technology bubble in 2000.

The most concerning historical example is the Arab Oil Embargo of 1973, when OPEC nations halted oil exports to the U.S. and other countries supporting Israel during the Yom Kippur War. Oil prices surged from $3 to $12 per barrel, and the S&P 500 fell 34.3% in the year after the embargo began.

Could This Time Be Different?

Today’s U.S. economy is far less vulnerable to oil shocks than it was in the 1970s. The country now produces more oil than it consumes, exporting roughly three million barrels per day, whereas in the late 1970s the U.S. imported as much as six million barrels per day.

The economy is also far less energy-intensive. Cars and appliances are more efficient, and services now make up a larger share of economic activity than the manufacturing sector once did. While the U.S. economy has nearly tripled in size since 1970, oil consumption has remained relatively unchanged.

Could This Be Brief?

High oil prices and the closure of the Strait of Hormuz hurt nearly every country in the world. That global pressure could push Iran toward negotiations with the U.S. and Israel sooner rather than later.

If the Strait reopens, oil prices could fall quickly and stocks may rebound. Because it is nearly impossible to time market recoveries, staying invested through periods of volatility remains one of the most reliable ways to participate in the market’s long-term gains once conditions improve.

At WHZ, we consistently work with our clients to ensure their portfolios are diversified and reflect their risk tolerance. By doing so, clients can be reassured that investment portfolios are appropriately positioned when unexpected global events cause market disruptions and when bull markets resume. Our goal is to provide you with Absolute Confidence. Unwavering Partnership. For Life. Call us at (860) 928-2341 or schedule a complimentary discovery session now  with our team.

Authored by WHZ Strategic Wealth Advisors Senior Partner & Chief Investment Officer Laurence Hale. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. 

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084, 860.928.2341. http://www.whzwealth.com. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. WHZ Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.