Opinion: How Iran war could affect inflation, stocks and Treasury yields

Richard Baker

First, we pray for the safe return of our service men and women stationed in the Middle East who are taking part in this military operation. 

Oil 
Oil prices surged 14% in the first  week as Iranian strikes on ships around the narrow Strait of Hormuz have driven energy prices into the conflict. Though natural gas prices have stabilized, we have seen concerned investors move to safe havens such as gold and the U.S. dollar.  

The threat from Iranian officials to fire on ships to try to block sea traffic through the strait led President Donald Trump to announce on March 3 that the  U.S. Navy would escort tankers through the strait if necessary to maintain oil shipments. Each day, 20 million barrels of crude oil (one-fifth of the world's oil) pass through this strait, so even short delays can significantly impact supply chains. Saudi Arabia and the United Arab Emirates have pipelines in place that allow oil to bypass the strait, but they are too small to make even a dent in the loss of capacity if the strait is blocked.  

The news that Iran's Islamic Revolutionary Guard Corps has warned ships to avoid this passage has prompted many vessels to turn back and reroute. It's not just oil tankers; container shipping companies, such as Maersk and Hapag-Lloyd, have begun rerouting ships around the southern tip of Africa, trying to avoid the Suez Canal and the Strait of Hormuz.  

If Iran were able to shut the strait completely, several banks predict oil prices will continue to rise over $100 a barrel. This would drive up the cost of fuel for cars and power plants and push overall inflation higher. There is a risk of a blockade, but most analysts agree that the U,S. military wouldn’t allow it to last long. 

Stocks 
If this conflict is resolved within a few weeks, with only a short disruption to oil shipments, markets will likely recover quickly. Markets have usually tolerated geopolitical crises like this. Historically, after these types of events, the stock market has recovered in 39 trading days on average with an average drop of 4.5%. In this case, because it is happening at the same time as ongoing market anxiety about artificial intelligence, we could see a 5–10% pullback in the market. 

Bonds     
Historically, when the U.S. conducts a major air campaign, it triggers a flight to safety, leading Treasury yields to fall as investors move into government bonds. The magnitude and duration of these moves depend on how long the conflict lasts, the size of the oil disruption and the size of the global economic fallout.  

The overall pattern of bond markets during times like these is that wars generally trigger an initial Treasury rally that quickly reverses when tensions end. The current Treasury rally fits the historical pattern of an initial flight-to-safety move that tends to fade unless the war triggers a long-term oil supply shock. Yields typically fall early but reverse quickly if the conflict is short-term; however, a prolonged war or major oil disruption can push yields higher.  

While the human element of the conflict is top of mind, investors should watch its effects on markets and the economy through oil and gas prices. The conflict is a great reminder of the value of an actively managed portfolio that adjusts an investor's risk level as markets swing.       
Pray for our troops. 

Richard Baker, an accredited investment fiduciary, is the CEO and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at richard@ferventwm.com.