The conflict between the U.S., Israel, and Iran has whipsawed the stock market since attacks began.
As of this writing, the war has spread to other countries in the Middle East, further complicating the situation. Since it began, investors have been trying to understand how long the operation will last and what its impact will be at its conclusion.
Predicting the future in any tense geopolitical situation is incredibly difficult, especially in the near term, so investors should certainly not try to trade around this event. However, here's what history has shown about the market's reaction in past wars.
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How does the broader market perform, and which stocks have performed the best?
Significant geopolitical events and wars create uncertainty, which investors don't like because it becomes less clear how the economy will perform and what policies the U.S. government will implement.
Additionally, the global economy has become increasingly intertwined, so even conflicts that are geographically limited can hurt supply chains, shipping routes, and other logistics networks, having an adverse impact on some companies while making others more valuable.
The Motley Fool compiled data on how the broad benchmark S&P 500 index performed three months before major U.S. wars and three months after the start of each war. The wars examined in the Motley Fool's research were World War II, the Korean War, the Vietnam War, the Gulf War, the Iraq War, and the Afghanistan War. On average, the S&P 500 lost 2.8% in the three months leading up to war, reflecting a period of great uncertainty, and 7.85% in the three months after the start.
More recently, during the Afghanistan War, which started in 2001, the S&P 500 collapsed 11.4% in the three months before, then gained 10.4% in the three months after the war started. The Motley Fool also looked at how large-cap stocks, small-cap stocks, long-term bonds, and five-year notes performed during war.
On average, across all these wars, small-cap stocks delivered a 12.2% return during the war periods, followed closely by large-cap stocks, which delivered an average 11.9% return. Both large and small caps outperformed their respective averages between 1926 and 2013. Long-term bonds and five-year notes each returned 3.8%, underperforming their long-term averages.
Oil is often an issue in wars, and is in the Iran conflict as well
One major threat to the global economy from wars is their impact on oil prices. While energy prices are not considered a core part of inflation by the Federal Reserve, they can certainly make consumers' lives much more expensive in a hurry. This is happening at a time when affordability is arguably the most important issue for U.S. consumers.
The stock market often struggles when oil prices surge because of their impact on consumers and because they raise the cost of doing business for corporations.
Crude futures have already surged 30% this year, largely on concerns that the Iran conflict would occur, and even more so when it actually started. Iran closed the Strait of Hormuz for the first time in history and also threatened to attack any ship trying to pass through it. The Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea, and roughly 20 million barrels of oil pass through this critical passage every day.
Analysts have already warned that the current conflict could send oil prices from about $74.40 per barrel (March 4) to over $100. Past wars have seen the price of oil surge. During the Gulf War in 1990, crude oil prices rose 135% between July and October of that year, according to CNBC. During the Afghanistan War, which went on for two decades, they roughly tripled between 2000 and 2008, although other factors played a role as well.
Frequently, recessions follow large increases in oil prices, and the U.S. has been dealing with affordability issues in recent years as oil prices have declined.
President Donald Trump has already offered "political risk insurance and guarantees" for tankers in the Gulf region, and even said the Navy could travel with tankers going through the Strait of Hormuz to provide safe passage.
While it's impossible to predict what could happen next, I think the market could bounce back fairly easily from this conflict if it is short-lived. However, any prolonged war or damage to energy assets in the region would likely create bottlenecks and raise oil prices.
If the conflict led to American boots on the ground, that would also likely hit the market pretty hard.
