U.S.-Iran conflict: A guide for investors

Markets have a long history of eventually looking through unsettling geopolitical headlines, but they sometimes struggle in the near term, especially when a conflict begins to interfere with the flow of commodities, agriculture or the cost of moving goods.

Over the coming weeks, the stock market’s reactions to the U.S.-Iran conflict will likely hinge on a handful of key market and economic signals. In our view, these signals could offer insight into whether the market impact remains contained or the situation develops into a bigger energy problem that affects inflation, interest rates and economic growth around the world.

As developments in the Middle East continue to unfold, here are five key dynamics investors should watch:

1. Shipping activity in the Strait of Hormuz

The Strait of Hormuz is one of the world’s most important energy chokepoints. Roughly 20% of global oil shipments transit this narrow corridor, and the seaway accounts for over 30% of seaborne oil trade. If ship traffic remains materially reduced or halted, we believe the oil market could tighten quickly, not necessarily because production is a problem, but because oil barrels and liquified natural gas (LNG) cargoes can’t reach their destination.

Importantly, insurance rates for cargo ships in the area have skyrocketed, which is why the White House recently announced that it would provide temporary insurance and, if necessary, military support through the Strait. This dynamic could help calm markets over time if the support leads to a clear improvement in ship traffic through the Strait in the coming weeks and months. As it stands, insurers have withdrawn coverage or sharply repriced it, causing shipowners to pause transit through the Strait even when the route is technically open. If this continues for an extended period, it could become a more significant problem for oil flows and production even with U.S. support.

Bottom line: Investors should expect oil prices to remain volatile until shipping through the Strait returns to normal.

2. Physical energy infrastructure impacts

Importantly, the market will continue to monitor whether oil disruptions in the Middle East are spreading beyond shipping to physical energy infrastructure. Several Iranian attacks across neighboring Gulf States point to possible longer-lasting disruptions affecting major energy assets, including across Saudi Arabia, Iraq and the UAE, for example. These developments could become more concerning if the frequency of attacks intensifies, as LNG and refined oil products can quickly transmit inflationary pressures to import-dependent regions, particularly across Europe, China and large parts of Asia.

Bottom line: Increased attacks by Iran or its proxies in the region on oil infrastructure or broader supply issues may cause producers in the area to reduce or halt production, either because facilities have been damaged or because products can’t easily reach their destinations.

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3. Effect on U.S. consumer spending

Closer to home, higher energy prices feed directly into consumer and producer prices, materially pressuring consumer spending if sustained for a long enough period. Consumer spending accounts for roughly 70% of U.S. GDP, and the recent spike in oil prices is already showing up in higher gasoline prices at the pump across the country. As a result, central bank commentary is quickly beginning to treat the Middle East situation as a fresh complication for policy direction, with a potential energy shock increasing inflation risks at the same time higher energy prices could weigh on growth.

According to Ameriprise Financial Chief Economist Russell Price, for every $10 increase in the price of West Texas Intermediate crude oil, the cost of gasoline at the pump increases by about 20 to 30 cents per gallon. Additionally, for every 10% hike in crude prices, U.S. gross domestic product (GDP) could decrease by approximately 0.3% to 0.4% on an annualized basis.

That said, the International Energy Agency (IEA), comprising 32 member countries, including the U.S., announced it would release a record 400 million barrels of oil from its strategic reserves worldwide to help address oil supply disruptions caused by the Iran conflict. In our view, this could help temporarily stabilize oil production concerns as well as limit crude price impacts if violence in the Middle East subsides sooner rather than later. 

Bottom line: In our view, the most negative economic impact on the U.S. economy from prolonged violence in the Middle East would likely come from higher oil and gasoline prices, reducing consumer spending.

4. Worldwide economic implications

If oil disruptions in the Middle East were to rise, and the release of strategic oil reserves were to become less effective in limiting economic impacts, we believe the U.S. is better positioned than most other major global economies. The U.S. is a net exporter of crude oil, produces much of the oil it uses domestically, and has additional buffers, including production from Canada and Latin America, to lean on for its energy needs. And while the U.S. is not insulated from rising oil prices, production disruptions overseas are less of a concern here at home, in our view.

In contrast, major energy importers such as China, Japan, India and Europe are more exposed to supply disruptions, especially those that rely heavily on Middle Eastern crude and LNG flows routed through the Strait of Hormuz.

If the Strait remains meaningfully impaired for any length of time, we believe these economies are more likely to face sharper energy cost increases with more direct economic consequences. At least initially, international stocks have seen greater selling pressure relative to the U.S. based on rising violence in the Middle East and its closer supply connections.

If shipping traffic and insurance normalize over the coming weeks and key facilities remain operational and intact, investors’ inflation concerns could quickly fade, allowing markets to refocus on a still-positive earnings and economic backdrop. However, if disruptions persist, market risks could shift further toward higher inflation, delayed rate relief and weaker consumer spending. This could result in softer GDP growth, with some international economies facing pressure from direct energy supply challenges and the U.S. primarily feeling the pressure through higher energy costs.

Bottom line: From a market and economic perspective, the critical question is whether the Middle East conflict restricts energy flows long enough to keep oil and gas prices elevated for a sustained period.

5. Broader market volatility

It’s possible that the developments in the Middle East could rattle markets further. Should stocks experience larger disruptions in the near term, it’s important to remember that periods of increased volatility are a normal and healthy occurrence in markets and have occurred for a variety of reasons over the last 20 years.

Although volatility may feel uncomfortable and could possibly cause a near-term drawdown in stocks, volatility in itself tends to be brief when it reaches more extreme levels. And more often than not, the extreme volatility provides investors a solid long-term entry point to buy stocks rather than sell.

Bottom line: As long as current economic and corporate fundamentals don’t become unanchored, we believe investors are well served by looking past the day’s events and ensuring they are comfortable with the risk profile of their portfolios.

Get help staying the course

Geopolitical events often cause temporary market turbulence, but they rarely necessitate a change in your long-term financial goals. During periods of market volatility, staying the course with a thoughtfully built investment portfolio is often the most effective path forward. And if markets become more uncertain, know that your Ameriprise financial advisor is here to help identify strategies to take advantage of the evolving market environment.