In the Markets Now: War in Iran

A Fluid Situation

Let’s begin with the obvious caveat – we don’t know what comes next for the ongoing conflict in Iran. Past geopolitical conflicts offer a broad (and often positive) outline for how markets may respond over the longer-term, but the range of outcomes is wide. And even if history says stock market returns are typically solid 3-, 6-, and 12-months following big geopolitical events, that doesn’t mean the next several weeks can’t get more uncomfortable first – particularly if oil remains on its current (parabolic) trajectory. Not to state the obvious, but it seems to us that markets are most unsettled by both the breadth of the conflict and the uncertain timeline for resolution. Investors have grown accustomed to geopolitical flare‑ups (and for that matter, general market selloffs) that ultimately prove short-lived V-shaped rebounds. Buying the dip has not just been successful in the post-2008 Financial Crisis crisis era, but has often been rewarded quickly. That’s never a guarantee.

The White House

And no doubt, investors’ assumption that the administration would rapidly respond to market and economic strain almost certaintly contributed to some complacency in markets. It’s still possible (and maybe even likely) that the administration capitulates to the negative impact that the war in Iran is having on oil prices, consumers, and financial markets (ala Liberation Day), particularly in a mid-term year. But it’s far from guaranteed given the additional complexity that comes with any geopolitical conflict.

Oil

As we wrote this week, the primary way that geopolitical crises abroad impact U.S. investors and consumers is via the price of oil. A sustained spike in oil is the worst of many worlds – higher oil and gas prices can almost immediately tighten consumer spending, push inflation numbers higher (forcing the Fed to the sideline at a time when rate cuts were widely antipated), and pressure corporate profits. The U.S. produces more natural gas and crude oil than any other country, which may leave price shocks less detrimental than the stagflation 1970s. But that doesn’t insulate the U.S. from the pain of higher oil prices – especially at a time where economic anxiety is already elevated. As for markets, spikes in oil prices are less damaging long-term than one might assume on face. We identified the major short-term oil spikes of the last 40+ years and looked at how the market responded – ultimately, even sharp oil spikes historically fade once the market gains confidence that supply continues to flow (often faster than investors expect). But again, the impact will depend on the depth and breadth of the conflict.

Long-term Effect

Ultimately, history suggests even sharp geopolitical shocks tend to fade in magnitude unless they alter the longer-term global growth or inflation outlook. Apologies for reiterating a point (hopefully) already made, but a majority of major post-WWII political conflicts involving the U.S. saw the stock market higher just six months later. History rarely repeats, but it often rhymes. And while the headlines are quite scary, the severity of the rhetoric doesn’t change the bottom line for investors.

We’ll never recommend changing a strategy, allocation, or investment plan – particularly one geared towards long-term goals – over geopolitical conflict. The history of the stock market is one where innovation and profit growth (incentivized at every turn by the gears of capitalism) tend to win out over short- and medium-term disruptions. If you asked me whether artificial intelligence or oil prices would be more important for the stock market in March 2027, I’d almost certainly say AI. But we are also not ignorant to the ways in which the world has changed over recent years. Deglobalization is a theme that our partners at Strategas, a Baird Company, have been discussing in depth for some time, with obvious implications for asset allocation (that they detail here). We will continue to monitor the situation closely. In the meantime, we’d not hesitate to remind our clients to reach out to their Baird Financial Advisor team with any questions related to their own portfolio and circumstances.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.
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