Markets in a Minute - The Iran War, Geopolitics, and Oil: What Matters for Investors

As the United States enters its second month of conflict against Iran, market volatility has intensified and oil prices have spiked. To help sort through the noise, we invited Ryan Bohl, Senior Middle East and North African Analyst at RANE Network for an in-depth analysis of the conflict. What follows are some of the most important takeaways from that conversation. You can access the full event here.

Key Takeaways:

• The conflict in Iran will likely take longer to wind down than the U.S. administration initially hoped:
  • The Iranian regime is much more resilient than Venezuela 
  • Iran’s goal in this conflict is simply to outlast the bombings and, in that sense, so far, they have been successful, though weakened
  • Most likely outcome: another 1-3 months of conflict 
• While military strikes and blocked trade routes have strained oil markets, the conflict has not permanently damaged oil production
• Markets have often proved resilient in the face of geopolitical shocks

Why This Conflict is Different

With a relatively rich resource base and resilient military and political structure, Iran could be defined as a “middle power,” making it much better equipped to withstand pressure from the U.S. than a country such as Venezuela. As such, it will likely be difficult for the United States military to force radical political change through aerial attacks alone.

Just as important is separating the signal from the noise. Real signals of escalation or cooling of tensions stem from actions, and not rhetoric. The number of troops being deployed, the level of infrastructure damage, and efforts from regional actors matter far more than political messaging.

From Geopolitics to Markets

Geopolitical conflicts hit consumers and markets the hardest through energy prices. This conflict is no exception, with the near closure of the Strait of Hormuz cutting off nearly 20% of the world’s oil flows. While the U.S. exports more oil than it imports, the disruption to the flow of traffic through the Strait carries meaningful economic consequences.

A critical distinction was discussed between disruption and destruction. Temporary disruptions like shipping delays or temporary blockades, such as what we have today, tend to be resolved relatively quickly. However, outright destruction leads to a much different outcome. If pipelines, refineries, or other facilities are permanently damaged, it can take years to repair. In that case, even if a ceasefire is agreed upon, the economic impacts of destruction to oil infrastructure will be felt long after active fighting stops.

Shorter Fighting, Longer Instability

While predicting the exact timeline of any conflict is challenging, Ryan shared that his base case was for active fighting to remain relatively short, but instability to persist for longer. He believes a ceasefire or significant reduction in hostilities could happen within the next three months due to the influence of political and economic constraints.

Even if wide-ranging military operations slow down, though, Iran has strong incentives to maintain low-level disruption and prevent a quick return to pre-war conditions. A swift resumption of oil flows through the Strait of Hormuz would negate Iran’s goal of making conflicts economically painful for their adversaries.

Political Constraints as the Off-Ramp

The domestic political environment may matter more than battle outcomes in determining how and when this conflict ultimately winds down. An open-ended military campaign against a middle power is expensive. As the costs tied to this conflict continue to escalate, political tolerance within the U.S. for remaining in battle will start to deteriorate.

Lawmakers will be focused on several inflection points: funding needed to continue the conflict, continued financial market stability, and voter sensitivity to higher energy prices. The need to authorize additional war spending could act as a constraint and encourage de-escalation even if key pieces of the original goals remain unfulfilled.

What History Suggests for Investors

Military conflicts understandably create volatility and tension for investors. But history offers a helpful guide. Across decades of market data, U.S. equities have performed well in the year after major geopolitical events. The S&P 500’s median return 12 months after 47 different political shocks has been 9.8%, ranging from Germany’s invasion of France in 1940 to the United States bombing of Iran’s nuclear facilities last year. Markets have often shown the ability to adapt.

While the environment may remain volatile in the short term, diversification across asset classes and long-term discipline remain the most effective principles for navigating uncertain environments.

Bottom Line

The Iran conflict is the latest signal of a broader shift to a more fragmented, multipolar global landscape. History proves that investors that adapt to uncertainty and remain diversified have been well positioned to weather similar periods of geopolitical tensions in the past.

Invest wisely and live richly,

Kara

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC, do not offer tax or legal advice.