How War in the Middle East Is Moving Stock and Commodity Markets

On Feb. 28, the United States and Israeli militaries carried out a round of airstrikes on Iran, citing a need to take action against Iran’s nuclear weapons program and calling for regime change within the country. Iranian Supreme Leader Ali Khamenei was killed in the attacks.

Iran has retaliated with missile and drone attacks on Israel, U.S. bases in the Middle East, and several U.S.-aligned Arab states, including the United Arab Emirates, Kuwait, Bahrain and Oman. Both sides of the conflict have struck targets within Iraq.

All of the countries mentioned have reported deaths in the recent exchange of strikes (including the U.S., which lost several soldiers stationed in the Middle East), raising fears that this may only be the beginning of a protracted regional war.

The Middle East is home to hundreds of millions of people and a large share of the world’s energy resources, which is why the clashes are already affecting financial markets worldwide, and could have a broad economic impact in the weeks ahead. Here’s what to know.

At the time of writing, five out of the twelve member states of the Organization of the Petroleum Exporting Countries (OPEC) have been attacked in the recent hostilities, highlighting how the violence could imperil the global supply of oil.

Brent crude oil futures — the main benchmark for the global market price of a barrel of oil — opened Sunday night about 8.5% higher than their closing price last week. The price of a barrel briefly rose above $80 at certain points on Monday, after trading at or below the $70 line for much of the last week. Natural gas futures saw similar gains between Friday and Monday.

As we will discuss below, this disruption to the global energy industry could have significant implications for the stock market. It is also already raising gas prices. But its most immediate impact has been on commodity traders, who didn’t have to wait until Monday morning to see the impact of this weekend’s news on their positions.

One non-energy commodity which has also been affected by the recent geopolitical turmoil is gold, as gold bullion is often perceived as a safe store of value in times of crisis. The price of an ounce of gold surged to an all-time high above $5,400 early Monday morning, before retreating to the mid-$5,300s range.

The S&P 500 index as a whole traded mostly flat Monday, as some of its biggest components (e.g., Big Tech) have little exposure to events in the Middle East — but some specific sectors of the market were hit by news-related volatility.

Stocks in certain industries, such as oil companies and defense contractors, rose Monday. Higher global oil prices mean higher margins for the oil & gas industry, and the prospect of a major war could increase government demand for defense contractors.

For example, shares of Chevron Corp. (CVX), the second-largest U.S.-listed oil company by market cap, rose 1.52% Monday. RTX Corp. (RTX), the largest publicly-traded U.S. defense contractor by market cap, rose 4.71%.

Other portions of the stock market reacted negatively to this weekend’s news — in particular, travel stocks.

United Airlines (UAL), the second-most-valuable U.S.-listed airline, saw shares fall by 2.91% on Monday, with other airlines posting similar returns. The prospect of higher fuel costs, as well as travel restrictions across the Eastern Mediterranean region, have bearish implications for airlines. Some cruise line operators were even more severely affected: Carnival Cruise Lines (CCL), the second-most-valuable in the U.S., saw shares sink 7.64%.

Day traders and futures traders may have no choice but to react to last weekend’s news, and its effect on markets, due to the short-term nature of those strategies.

But for investors with long time horizons, such as those building a retirement nest-egg, trading the recent volatility is unlikely to pay off. A 2022 study published in the Journal of Finance examined the top stocks purchased on Robinhood between May 2018 and August 2020, and found that their average 20-day return was -4.7%, suggesting that most short-term traders on that platform lost money in that period[0]

Investing experts tend to recommend staying the course instead, and making consistent contributions to buy-and-hold investments like index funds throughout periods of volatility.

If you’re looking to invest for the long-term — but you think you might be prone to flinch at news events like those of the last weekend — taking yourself out of the equation by getting a robo-advisor or an online financial advisor to manage your portfolio may be worth considering, too.