Since the U.S./ Israel attack on Iran, U.S. stocks have been more volatile. They had periods of high volatility in 2025 with tariff announcements, and now the war has brought the volatility back.
One of the big concerns for investors is the price of oil. On days where it seemed like there was a possible end in sight to the conflict, oil would generally go down and stocks would generally go up.
On days where threats were intensifying and the oil price would go up, then stocks were more likely to take a fall. It hasn’t been a perfect correlation, but this has been the trend.
Interestingly, gold investors have not been rewarded during this conflict, at least to this point. The price of gold (in terms of dollars) has generally gone down as tensions have gone up. This seems to break the narrative that gold is a safe haven and generally goes up during times of uncertainty.
Higher Oil Prices
While the price of oil is bad for our living standards, it doesn’t necessarily have to be bad for stocks. Obviously, energy companies could benefit just because of the higher prices for energy. Of course, companies operating in the Middle East could be hurt badly.
But if you are a company that drills for oil in the United States, then you are doing much better, financially speaking. At least for now, you are paying the same prices to extract oil, but you get to sell it at a much higher price.
The problem is for all of the other companies that get hurt by higher oil prices because it means higher expenses. This seems to be the main reason that stocks, in general, are going down in response to higher oil prices.
This also impacts consumers. If you have to pay more to fill up your car with gas, then you won’t have as much to spend on other things. Maybe you won’t buy that expensive sweater. This means lower profits for the clothing company.
This is why higher oil prices alone is not generally inflationary in the long run. Higher oil prices make some things more expensive, but it means people have less money to spend in other areas. This can actually drive down other prices.
The only way you can have a sustained inflationary environment is by having more money in the system.
Stocks, War, and Inflation
Wars being fought overseas has not necessarily been bad for U.S. stocks. Let’s look at Iraq and Afghanistan. U.S. stocks performed poorly from 2000 to 2002. This was the crash coming off of the tech bubble.
The war in Afghanistan started in late 2001. The war in Iraq (or the bigger phase of the war that was started in 1991) started in 2003. Stocks actually went up after the war in Iraq started in 2003. They went higher until the financial crisis of 2008.
When wars are being fought in other parts of the world, they don’t seem to have that much impact on U.S. stocks. They are quite beneficial for the military-industrial complex. If anything, wars can actually be beneficial for stocks in general because they are inflationary.
The U.S. is able to fight expensive wars because of the central bank’s ability to create money out of thin air. If taxpayers were told they had to pay for wars with higher taxes, then the wars probably wouldn’t happen or would not last as long.
When new money is created, it does have a tendency to drive prices higher. This includes asset prices. Stock investors often benefit with the inflationary environment.
War in the Middle East
The war in Iran could be a bit different than what we have seen in recent decades. The war in Iran isn’t just in Iran. Israel is getting hit hard by missiles. U.S. military bases are getting hit hard throughout the Middle East. While the U.S. establishment media hasn’t covered this much, there are reports that there has been extensive damage to U.S. bases.
Iran has also been able to fully control the Strait of Hormuz and stop the shipping of oil from any countries that are not considered friendly.
There are discussions about the U.S. possibly exiting the war, but it doesn’t end the problems. Iran can keep firing missiles. Iranian officials will continue to keep the Strait restricted until it gets some assurances that it won’t be attacked again anytime in the near future.
In other words, this is a different animal from the war in Iraq.
At the same time, as with virtually all wars, this war will be inflationary. There was already a major spending problem in Washington DC. We could be seeing trillion-dollar deficits over the course of 3 or 4 months.
Tug-of-War in Stocks
There are a lot of different things happening to pull stocks in different directions. The same could be said for gold.
It’s easy to forget that there was an inverted yield curve in 2023 and 2024. It has gradually normalized. This is a warning sign of a recession, which we obviously haven’t seen yet.
Will this economy defy the inverted yield curve? Or will the economy fall into recession regardless of what is happening in the Middle East? Will the added inflation from war spending delay us from going into recession and prop up stocks?
If we do go into recession, the higher oil prices from the war will get the blame. But perhaps it was baked into the cake already.
There are a lot of major factors going on here. We have a recession threat and higher oil prices threatening stocks. But we also have monetary inflation pulling stocks in the other direction.
The economy is complicated enough without a major war and disruption in the flow of oil. One thing that is likely is that we will continue to see high volatility in the stock market.