Stock markets fell two straight days and were down dramatically the morning of March 9th before staging an afternoon turnaround into positive territory when President Trump said he believes the war is “very complete, pretty much”. It remains to be seen how much longer it will last, but this type of volatility may continue until the war is over. The Strait of Hormuz, which about 20% of global oil consumption and 25% of seaborne oil trade flows through, is still effectively closed. Despite American offers to provide naval escorts and insurance guarantees, shipping companies have judged the passage too dangerous to risk.
Brent crude surged to over $100 per barrel on Monday before settling back under $100 per barrel. The available energy storage capacity in the region is estimated to last only for a few weeks before oil-producing nations will be forced to curtail new production.
For now, the consensus expectation is that the war will be short—a month at most. The market took President Trump’s comments as an indication that he is looking for an exit. If that proves correct, the drag on growth from higher oil prices should be modest. Analysts anticipate that U.S. GDP will be reduced by only a few tenths of a percentage point, and the direct hit to consumer inflation would be limited: energy accounts for roughly 6 percent of the consumer price index. Because the United States is now a net energy exporter, it is relatively insulated compared to Asian and European economies. Higher prices may even stimulate shale production, partially offsetting the blow to consumption.
But if the conflict drags on, things become much more uncertain. Goldman Sachs estimates that each $10-per-barrel increase in oil prices could reduce GDP growth by about a tenth of a percentage point. More worrying are the inflation dynamics: Goldman says that a sustained 10 percent rise in oil prices is estimated to add roughly 28 basis points to headline CPI. Should prices remain sticky at $100 or above—particularly if Saudi production is disrupted—the increase in inflation would be sharper, potentially passing through into goods and services prices across the economy.
This is the fourth major supply shock since 2020, following the pandemic, tariffs, and the immigration crackdown. Cumulative effects are a genuine concern. Consumers and businesses were already anxious about inflation before the war, and the increased likelihood of higher prices may be enough to cool spending.
Since the United States is a net oil exporter, higher prices create roughly as much benefit for domestic producers as they cost consumers in the aggregate. The result is that the oil shock may affect inflation more than overall growth. Yet the burden is not distributed evenly. Natural gas and fuel oil account for a far larger share of pre-tax income among lower-income households than among wealthier ones. The war thus threatens to deepen the “K-shaped” economy that has been taking hold in recent years—one in which the affluent are largely insulated from shocks that weigh heavily on those at the bottom. The political consequences of this divergence could prove significant.
It is difficult to predict how the conflict will reshape the region, or how long it will last. President Trump has shown a preference for higher equity markets and lower oil prices, but geopolitical ambitions can conflict directly with domestic economic goals. Whether both can be achieved simultaneously remains an open question.
So far, equity markets have proved surprisingly resilient. Despite the oil shock and a disappointing nonfarm payrolls report of a negative 92,000 versus a consensus expectation of positive 50,000, the S&P 500 Index is only down modestly since the bombing began. The conflict has delivered what might be characterized as a mild inflationary shock. Physical flows have been disrupted, but it is too early to judge whether the disruption will persist long enough to cause demand destruction.
The conventional wisdom is that long-term investors should tune out geopolitical noise. Yet modern warfare technology means Iran may be capable of keeping the Strait of Hormuz locked down for longer than past conflicts would suggest, suppressing global growth and elevating inflation simultaneously.
So what are investors to do? The Iran conflict underscores an enduring principle: diversification matters, especially in periods of heightened uncertainty. For now, the market’s resilience offers some reassurance, but the range of outcomes remains wide. The most likely scenario is a swift resolution, which would limit the economic damage to a modest inflationary bump. A prolonged conflict, which most experts say is a low probability, could keep the world’s most important energy chokepoint closed and severely hurt global economic growth.
It is important to keep in mind that geopolitical events can cause market volatility but typically do not have a lasting negative impact on long-term stock performance. Historically, after significant global conflicts or political crises, the stock market has often rebounded and delivered positive returns.
One year after the geopolitical events listed in the chart above, the S&P 500 index has returned 14.23% on average. Of course, we can expect volatility in stock prices to remain elevated until the war is over. As always, the wisest course is to build a globally diversified portfolio of return generating, risk mitigating, and income producing assets.
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