Markets and the Escalating Conflict

Over a week into the latest Middle East conflict, a lot is happening. The US became officially involved over the weekend, Iran’s legislature voted to block the Strait of Hormuz on Monday, and both sides (and their allies’ assets throughout the region) continue taking fire. The situation remains tragic, complex and unsettling, and our hearts go out to all affected. Yet markets seemed to take it all in stride.^[i] European stocks fell a bit Monday, but the S&P 500 rose 1.0% in price terms and oil actually erased much of its recent rise. While short-term volatility is always a wildcard—unpredictable—so far, it looks like markets are gradually moving on from the initial scare.

Stocks’ reaction has been rather muted from the start, with returns basically flattish and daily moves far milder than April’s tariff-induced wildness. Oil appeared to be where investors registered the bulk of their fears, tied to supply concerns. The prospect of Iranian crude leaving the market or a blocked Strait disrupting tanker traffic caused Brent crude, the global benchmark, to leap from $70.84 on Thursday June 12, the day before Israeli forces struck Iranian nuclear targets, to $76.00 the next day.^[ii] That closing price was actually down from intraday highs, indicating fear was perhaps giving way to a rational assessment of global supply.

Oil mostly bounced sideways over the next week as the fighting continued and rhetoric escalated. But after oil futures jumped Sunday night following the US airstrikes, crude fell sharply Monday. As we write just after stock market close PDT, it trades below $72.00, down significantly from $76.99 at Friday’s close.^[iii] Yes, US airstrikes, Iranian counterstrikes on a US base in Qatar and a parliamentary vote to close the Strait all added up to a steep down day for crude.

At first blush, that seems like a headscratcher. But markets tend to like falling uncertainty, and we are gradually getting it. US airstrikes answered questions over whether and when other major powers would get involved. Iran’s counterstrike on the base in Qatar eased fears that it would retaliate by attacking oil infrastructure in the region. And while its legislature voted to close the Strait, that vote is symbolic. The decision rests with the country’s top leaders, who have never closed the Strait despite multiple threats to do so over the past 40 years. That doesn’t automatically mean they won’t now, but there are real questions about whether Iran’s navy has the capacity to close it, especially with a stepped-up US presence in the region. For now, jawboning appears to be the tactic of choice.

At the risk of stating the obvious, war is a terrible, terrible thing. But terrible at a human level doesn’t always translate to terrible in stock or commodity markets. Generally, when regional conflict erupts, markets will first reflect the initial fear and uncertainty, and then that initial reaction will fade as the real scope becomes apparent. Israeli markets are an easy way to see this. As we noted when the conflict first broke out, the MSCI Israel is up bigtime since the war in Gaza began, and it was the MSCI All Country World Index’s top-performing nation last year. The TA-125, a broad local benchmark, is up 6.5% in local currency since market close on June 12.^[iv] The market with the most direct exposure to the conflict remains resilient.

These situations can change quickly, so we will continue monitoring the situation and keeping our readers updated. But so far, markets are following their typical playbook for regional conflict. Initial jitters usually fade as investors see the fighting remains isolated and global commerce continues. Patience and discipline have historically served investors well at times like these, in our view.