A couple of weeks ago I wrote about the historical impact major international conflicts can have on the stock market. My argument was that the recent military actions in Iran did not necessarily mean that an imminent market collapse was likely.
With that said, the market has certainly been expressing concern about the escalating tensions in the Middle East, particularly around the Strait of Hormuz, which serves as the primary corridor for Middle Eastern oil transport. Since military action began in late February, the price of a barrel of oil has risen by about 40%, and last week crossed the $100 mark for the first time in almost five years.
If stability is brought back to the region we could easily see oil prices not only return to their pre-war levels but actually fall further as supply available to the West increases. On the other hand, if the remnants of the Iranian regime maintain their ability to create chaos in the Gulf, we could easily see surging oil prices much like we did in the 1970s.
It is going to take some time before we know whether this spike in prices will be temporary or long-term, but the impact on your investment accounts is probably being felt as we speak. Since US military actions began on February 28th, the S&P index has fallen more than 2.5% as of Monday evening when I am writing this. This drop is largely due to fears that sustained high energy prices could impact the economy by increasing inflation, reducing discretionary spending, and contributing to overall consumer pessimism.
A common rule economists often quote is that for every sustained $10 increase in the price of a barrel of oil, global GDP drops by about a quarter of a percent. This economic principle is not lost on world leaders. In an attempt to stabilize oil prices and prevent potential economic slowdowns, last week President Trump approved the release of 172 million barrels of oil from our Strategic Petroleum Reserve. At the same time, the International Energy Agency (IEA) coordinated the release of an additional 400 million barrels to combat shortages being created by the war.
If recent volatility has made you hesitant to check your portfolio balance, you should know price spikes in oil don’t exclusively cause stocks to go down, there are also companies that benefit from these increases. That is why having a diversified portfolio is so important. Obviously, one of the biggest winners when the price of oil goes up are oil producers. They’re not alone, however. Because higher energy prices are naturally inflationary, other commodities also tend to do well during these periods, particularly precious metals. Wholesale and discount retailers can also benefit as consumers attempt to reduce spending in other areas to offset higher fuel costs.
Events like these serve as a reminder that markets are constantly adjusting to forces far beyond any one investor’s control. Oil prices may rise or fall depending on how events unfold in the Middle East, but the long-term success of an investment portfolio should never hinge on predicting geopolitical outcomes. In other words, uncertainty is not something investors can eliminate, but it is something a wise investor should at least prepare for.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)