Iran Strike Leads to Stock Rally and Lower Oil Prices. Why?

U.S. military action last weekend could have been bad news for investors. Instead, the investing outcome has been mostly bullish, and Mitch offers some reasons why.

The U.S. Strikes Iran, Equity Markets Rally, and Oil Prices Fall. Why? As readers know, the United States took military action on Iran’s nuclear facilities last weekend. From a pure investment perspective, the ‘bad-case scenario’ for markets was a risk of bold retaliation, a full blockade of the Strait of Hormuz, and/or the dawn of a wider war. If any of these three outcomes were realized, I would have expected markets to open on Monday with sharp downside volatility. That didn’t happen. As we know today—at least considering this immediate aftermath of U.S. military action—none of the above bad-case scenarios played out. From a market perspective, uncertainty continued to narrow as days passed and a cease fire took hold, and the negative tail end of bad outcomes became increasingly unlikely. So, stocks went up. When reality is better than expectations, the outcome is generally bullish. But we can also look historically to understand that conflicts involving the Middle East—which have been ongoing for decades—have yet to cause major ripple effects on global growth or corporate earnings. I do not believe this instance will be different. 1 Calm Markets, Big Signals—Your Next Move Geopolitical crises may have you questioning whether the market can stay steady — but recent events have shown surprising resilience, revealing shifts that investors shouldn’t overlook. Our June Zacks Stock Market Outlook Report 2 dives into the factors behind this stability, the risks still ahead, and how to position your portfolio for the months to come. Inside, you’ll find: Asset allocation guidelines for today’s market environment. Expert forecasts for inflation, rates, and economic trends. Industry tables and rankings to help you spot opportunities. Buy-side and sell-side consensus insights at a glance. And much more! If you have $500,000 or more to invest and want to take charge of your financial journey, click the link below to get your free report today! IT’S FREE. Download our Exclusive June Zacks Stock Market Outlook Report 2 Zooming out even further, we also know that looking back at conflicts since 1925—including the Korean War, Vietnam, the Cuban Missile Crisis, the Iran-Iraq War, two U.S. wars in Iraq, and so on—it was only World War II that resulted in a bear market. The Iran-Iraq War lasted from 1980 to 1988, which corresponded with a strong bull market that lasted from 1982 to 1987. And in the year following Hamas’s terrorist attack on Israel, the S&P 500 and global stocks as measured by the MSCI World rose approximately +30%. Source: Federal Reserve Bank of St. Louis 3 Shifting back to the current situation, Iran did ultimately retaliate by firing on U.S. military bases in Qatar. But they also gave advance notice to the United States and Qatar hours prior to carrying out the attack—such that no lives were lost and the missiles were successfully intercepted. On the matter of the Strait of Hormuz, a warning sign for markets emerged when Iran’s parliament approved a measure to block the strait in response to U.S. airstrikes. But I view this measure more as a pressure tactic than policy, considering that Iran itself exports a significant share of its oil through the Strait. Blocking the strait completely would be costly with limited strategic benefit, in my view. But oil markets appear to hold this view as well. Although oil prices saw a short-term bump, they quickly stabilized as current shipping traffic through the Strait continues without interruption. I agree that uncertainty leading up to—and surrounding—a conflict is what tends to weigh on markets. But once the worst-case scenario is averted and/or fighting breaks out but remains regional, the uncertainty fades and markets can start to price in the effects on corporate earnings, financial markets, and global economic growth. In this instance, I think markets are already telling us that the impact on all of these key fundamentals should be minimal. Bottom Line for Investors Geopolitical crises and wars are highly undesirable for their impact on the daily lives of affected civilians, global stability, trade, and so on. But a global recession requires trillions of dollars’ worth of damage to the global economy, which current crises do not seem capable of delivering. S&P 500 companies earn less than 1% of revenue from the affected regions, which includes Ukraine. Market volatility may continue if the conflicts escalate, and news coverage will almost certainly be constant. But investors would be wise to foresee this environment for the next few months—or perhaps longer—and try to remember that the desire to react to a crisis is almost always counterproductive and costly. Now is a time to remain patient and focused on U.S. economic fundamentals and corporate earnings, which we believe are holding up quite well. As markets navigate ongoing uncertainty and volatility, having a clear plan is more important than ever. Our June Stock Market Outlook Report 4 delivers a timely analysis on potential risks and emerging opportunities, giving you the insight needed to make informed decisions in a complex environment. Inside, you’ll find: Asset allocation guidelines for today’s market environment. Expert forecasts for inflation, rates, and economic trends. Industry tables and rankings to help you spot opportunities. Buy-side and sell-side consensus insights at a glance. And much more! If you have $500,000 or more to invest and want to learn more about these forecasts, click the link below to get your free report today! About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. 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