Navigating the Conflict in the Middle East

The ongoing conflict between Israel and Iran has grabbed worldwide attention and made financial markets uncertain. Israeli attacks on Iranian nuclear facilities and military targets started on June 13 and quickly led to Iran fighting back. While the situation is still changing and can shift quickly, there are now reports that Iran might be willing to stop fighting and start talking about its nuclear programs again. This is happening even as the war between Israel and Gaza continues, and other regional conflicts keep going in different parts of the world.

While the human cost is the most important thing to consider, investors also need to understand how these events affect markets. Perhaps the biggest worry among investors is whether events like these could grow into full-scale global wars. While this is always possible, recent history does not suggest this will happen. Instead, even serious conflicts, including Russia's invasion of Ukraine and Hamas's attack on Israel, stayed limited, causing only short-term stock market ups and downs.

This doesn't make these conflicts less serious, but it reminds us that making big changes to our investment portfolios because of these events can hurt us. In times like these, it's more important than ever to keep things in perspective and focus on what history teaches us and long-term market patterns. What should investors pay attention to in this situation to stay disciplined in these markets?

Tensions in the Middle East have gotten worse

The recent events show that the conflict between Israel and Iran has gotten more serious. Israeli forces attacked Iranian nuclear sites and military leadership, with reports showing damage to uranium processing facilities. Iran has fought back with missile and drone attacks, with some reaching Israeli territory. The conflict has also damaged important infrastructure on both sides, including natural gas facilities and oil refineries.

At the risk of making things too simple, historians tend to view every event as unique, with its own story, causes, and results. Economists, on the other hand, tend to look for patterns and similarities between events to make broad conclusions. As investors, both viewpoints are important to understand what lessons do and don't apply. After all, a common saying is that history doesn't repeat itself, but it often has similar themes.

The chart that comes with this article gives some historical context around political events over the past 25 years. This includes conflicts in the Middle East that affected oil prices, such as the Iranian drone attacks against Saudi Arabia in 2019. These periods show that while markets can swing up and down in the short term, markets have typically bounced back from political shocks, often within weeks or months of the initial event. What mattered more during these periods were the underlying business and economic trends.

Oil prices have been going up and down

In the short run, oil prices can act as a way that regional conflicts impact the rest of the world. The immediate market reaction to the latest conflict focused on energy markets, with Brent crude oil prices rising above $74 per barrel. Oil prices remain unstable but fell back toward $70 per barrel on news of possible peace talks.

Oil prices affect the global economy since they are still a major cost for all products and services. Higher oil prices lead to more expensive gasoline and transportation costs, raising prices for everyday consumers and businesses. This problem gets worse if important shipping lanes close, including the Strait of Hormuz in the Persian Gulf. This strait is a critical waterway through which about one-third of the world's oil supply passes.

Still, it's important to keep current oil price levels in perspective. While recent changes are notable, prices remain well below the peaks reached in 2022 during the early stages of the Russia-Ukraine conflict, when oil exceeded $120 per barrel. The current price level around $70 is within the range we've seen over the past few years. Just this year alone, oil prices have moved between $60 and $82 per barrel.

It's also important to note that the U.S. has become much more energy independent over the past two decades. American oil production now exceeds 13.5 million barrels per day. Some may find it surprising that the U.S. is the world's largest producer of both oil and natural gas. While the U.S. still needs foreign oil and is affected by global oil prices, the fact that there is a significant domestic supply helps to protect the U.S. economy and

financial markets.

How wars affect investment portfolios depends on business cycles

For investors worried about growing conflicts around the world, looking at the big picture can help provide perspective. From World War II to the Iraq War, markets may have reacted to these conflicts in the short run, but were driven by investment fundamentals in the long run.

For example, World War II jump-started industrial production after the Great Depression, and led to a big shift in the labor market with women entering the workforce. These factors helped drive the economy through the rest of the century. Similarly, the Gulf War affected oil prices, but also happened at the same time as the Information Technology revolution of the 1990s. In contrast, the decade following the Vietnam War happened at the same time as high oil prices and stagflation (when prices rise but the economy doesn't grow), resulting in poor market performance.

Again, none of this makes the human and social costs of these wars less important. For the current situation, much will depend on whether the conflict gets bigger or begins to calm down. The involvement of major powers and threats to critical supply routes add complexity, but history suggests that even significant regional conflicts tend to have limited long-term impact on global financial markets.

While Middle East tensions have created short-term market ups and downs, investors should keep things in perspective and avoid making big changes based on headlines. A portfolio that matches your long-term financial goals remains the best approach for getting through periods of political uncertainty.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Examples are for illustrative purposes only. All investing involves risk of loss including the possible loss of all amounts invested.