Events in Iran are unfolding quickly, prompting global attention and concern. Beneath the headlines lie human stories, which remind us that geopolitical risk is measured not only in strategic terms but in personal ones.
While the human dimension remains central, the speed of events is also raising important considerations about how such geopolitical stress may intersect with markets and the wider economy.
A useful way for investors to think about this moment is to break it into several layers: What has changed in the global backdrop? How could these events reach markets and the global economy? And what adjustments, if any, should investors consider in their long-term portfolios?
Read on for 5 takeaways for investors.
1. Markets are reacting somewhat more strongly than they did to other recent geopolitical events
Although the stock market has not yet experienced a significant reaction to the latest developments, there has been a greater reaction in the US bond market and in oil prices. Notably, the market response has been sharper than the reaction that followed US military action in Venezuela in January.
One reason may be that the current conflict in Iran could take longer to play out, says Jake Weinstein, senior vice president on Fidelity’s Asset Allocation Research Team. “A key difference is uncertainty in how long this may take to stabilize,” he says.
Another reason is that there is a wider range of possible outcomes and risks. Unlike a leadership change in a smaller economy, the situation in Iran raises more open‑ended questions—both about how domestic stakeholders may respond and about how the conflict could interact with global energy flows.
Says Weinstein: “The type of conflict and the length of a conflict are both very relevant to how markets may ultimately digest the news and react over the next several weeks or even months.”
The bottom line for investors: Markets are not anticipating any specific outcome of the current conflict. They are pricing in a wider range of risks, particularly given Iran’s geographic position near the Strait of Hormuz, one of the world’s most important energy corridors.
2. Oil is the most important transmission channel
Historically, global military events have often had little impact on the broader economy and markets, notes Denise Chisholm, Fidelity’s director of quantitative market strategy.
“This is not because the events aren’t important,” she says. “Rather, it’s because these events typically don’t generate the kind of economic catalyst—something that alters credit creation, aggregate demand, or earnings—that can move the needle for markets in a durable way.”
In the case of Iran, oil is the key economic channel to watch. Prices rose on March 2 as investors assessed the possibility of supply disruptions. Iran exports an estimated 1.5 million barrels of oil per day. And the country has significant leverage over the Strait of Hormuz, which about 20% of the world’s oil supply passes through.1
Weinstein notes that in addition to constraining supply, these developments could drive increased demand over the longer term if the conflict continues. He notes that the Russia-Ukraine war prompted Europe to take a hard look at its energy reliance on Russia. Similarly, “In an environment of higher geopolitical risk, countries may want to target higher strategic reserves of oil,” he says. If so, higher demand could put further upward pressure on oil prices.
The bottom line for investors: If the Iran conflict were to impact the broader economy, it would be most likely to do so through oil prices. Upward price pressure could come from both restricted supply and increased demand.
3. Potential impacts on growth may be limited
Rising oil prices may make investors think of the 1973–1974 oil embargo and the 1979 Iranian Revolution—both of which caused spiking oil prices and contributed to US stagflation. When energy prices rise significantly, it can eat into consumers’ incomes and pressure their overall spending, putting a drag on broader economic growth.
Chisholm notes that the US economy may be more resilient to rising oil prices than it was in that period, because energy represents a relatively small part of consumers’ budgets. “The way these shocks move through the economy depends on how much consumers spend on energy,” she says. “In the 1970s, that was nearly 8% of income, while today it’s closer to 3%—near the lowest levels on record. That doesn’t mean higher energy prices can’t strain incomes, but it does mean the economy starts from a far less vulnerable place.”
Weinstein agrees, noting that the conflict in Iran is unlikely to have a significant impact on the US economic cycle unless energy prices rise far beyond levels seen in recent years, and/or remain elevated for a prolonged period.
The bottom line for investors: Prices may rise at the pump in the near term. But the economic landscape is very different from the 1970s. A more severe economic disruption is not impossible, but is not the most likely outcome.
4. Investors should avoid reacting to the news in their portfolios
Periods of geopolitical stress often create the sense that markets must be bracing for something big. For investors, the biggest challenge of such moments may be resisting the impulse to make drastic moves in their portfolios.
“Military events often prompt anxiety for some investors, and they may be tempted to react to news headlines and initial market volatility,” says Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of Fidelity’s managed accounts. “However, my team’s research suggests that historically, initial market volatility stemming from military events has given way to market recoveries and new rallies.”
Chisholm has researched historical stock market performance following periods of military conflicts, and found that on average, there has typically been little impact. “When you aggregate a broad set of crises, from Pearl Harbor through the recent Russia-Ukraine invasion, the average S&P 500® return over the following year is roughly 8%, almost identical to equities’ long run annual average,” she says.
Again, these events often lack a transmission mechanism to influence the broader economy, or else do not have a significant enough impact to meaningfully change the trajectory of growth and corporate profits. Says Malwal, “Eventually, initial worries typically give way to most investors focusing on market fundamentals, such as the outlook for corporate profit growth and the pace of US economic growth.”
The bottom line for investors: Making a big move to try to “get ahead” of further volatility or news developments could do more harm than good.
5. Reevaluating long-term portfolio positioning may be appropriate
While it’s important not to make reactive portfolio moves in response to short-term news events, Weinstein notes that broader trends of global instability could prompt some investors to reevaluate their long-term asset allocations.
“The world is now in a more multi-polar regime, with multiple large powers in competition with one another, and pursuing their own different objectives,” he says. While a global order driven by 1 great power (such as the US) or even 2 great powers (such as the US and the USSR, as during the Cold War), may be more stable, a multi-polar dynamic can be particularly unstable. “In this kind of regime, you are more likely to have unexpected conflict,” says Weinstein.
That shift doesn’t call for a whole new asset allocation. But investors might consider it an invitation to take a fresh look at whether their portfolios include sufficient diversifiers. For example, Malwal notes that portfolios managed by Strategic Advisers typically include “a mix of global stocks, bonds, short‑term investments, and other diversifiers such as commodities or inflation-protected bonds.”
In the past, investors could often rely on bonds to act as portfolio ballast when stocks became volatile. Weinstein notes that in more recent bouts of volatility, there have been periods when stocks and bonds both underperformed at the same time. These periods have highlighted the growing appeal of commodities and other real assets as potential portfolio diversifiers.
“In 2022, when the Russia-Ukraine war started, commodities provided a hedge for stocks when bonds did not,” says Weinstein. “It may make sense to ask, ‘If we are in a higher geopolitical risk environment, do I have enough real assets or other hedges?’”
The bottom line for investors: Periods of volatility can be a reminder to periodically reevaluate whether your long-term investing plan is serving you the way you need it to.
In conclusion
It’s important to stay informed as an investor when new developments emerge or market volatility increases. But if you have a sound plan in place that is well-suited to your goals, time horizon, risk capacity, and risk tolerance, such events are often not a reason to react. (Learn more about how to navigate volatile markets.)
Whether you need help developing or revisiting a plan, or you just want to check whether your portfolio still makes sense in the face of a world of evolving risks, Fidelity can help.