On Feb. 27, the United States and Israel launched coordinated military strikes on Iran targeting missile infrastructure, regime leadership and nuclear facilities.
The attacks killed Iran’s supreme leader, Ayatollah Ali Khamenei, and scores of other top regime officials.
This marks a decisive escalation from years of shadow conflict into overt warfare, driving up risks for global energy markets, risk assets and the broader macroeconomic backdrop.
Initial market reaction was moderate but price action as of this writing on March 4 has been broadly negative.
An important variable for the path forward is duration.
A short, contained campaign — which remains the base case among most institutional strategists — would likely produce a modest impact on the economy and markets.
A protracted conflict that threatens the Strait of Hormuz or draws in broader regional actors would represent a qualitatively different risk environment and the threat of a longer-term conflict.
Note that while military conflicts come with human tragedy, the focus of my comments is intended to deal with economic and investment impacts.
The military attacks in Iran and around the Middle East have significantly raised already high geopolitical risks that have threatened the global economy and financial markets.
It’s difficult to know what’s next, but we’ve already seen some quick impacts.
Oil and Natural Gas
About 20% of global oil and natural gas supply passes through the Strait of Hormuz. Insurance cancellations, shipping premium spikes and vessel rerouting are already occurring, driving up the prices for both oil and natural gas.
But unlike the 1973 oil price shock that depressed market returns over the next year (remember long gas lines?), the United States has ample supply of domestically produced oil and natural gas. The same is not true for many other parts of the world.
Gold
Long viewed as a safe haven against inflation and geopolitical risks, gold prices have spiked a bit after an already significant run-up.
Gold was under $3,000 an ounce a year ago, but now has pushed up to more than $5,000 an ounce.
Stocks
In a word, markets have been volatile. U.S. equity markets have seen big daily swings but have actually behaved fairly well, likely reflecting a strong underlying economy and energy independence.
Non-U.S. equity markets have seen bigger downturns, in large part given greater dependence on Middle East oil and natural gas.
China imports more than 70% of its oil needs, including 80% of Iran’s total exported crude. South Korea imports nearly 98% of its fossil fuel with very little from Iran but more than 70% from the Middle East.
The KOSPI is down sharply over the first week since the war began. Japan is a similar story, with the NIKKEI down nearly double-digits over the first few days.
Bonds
As CNBC reported, bonds have defied the safe-haven playbook in which investors traditionally seek the safety of U.S. Treasuries and drive up prices.
While global bond markets have to-date been relatively calm, inflation worries have pushed the 10-year Treasury yield back up above 4%.
The headlines are alarming, and accurately predicting the future is always difficult. But a look back at history of markets navigating crisis can offer a steadying perspective for long-term investors.
The pattern is remarkably consistent: volatility spikes amid geopolitical events and valuations compress temporally as fear rises. But they do not, as a rule, alter the fundamental nature of long-term wealth building.
Patience has historically been rewarded while those selling out of fear often are the losers, selling in down markets and then missing rebounds.
For investors with prudently diversified portfolios and long-term horizons, history has shown rewards for staying the course.
Big picture, history tells us that geopolitical events are both unpredictable and tend to be short-lived in terms of market impact.
And while there are no guarantees about what will happen in the future, I am reminded of Mark Twain’s quote that “history doesn’t repeat itself, but it often rhymes.”