On Saturday, the United States and Israel launched a joint attack on Iran in an operation that President Donald Trump’s administration has dubbed “Operation Epic Fury.” Iran confirmed that Ayatollah Ali Khamenei, the country’s supreme leader since 1989, was killed in the attack. Several other top-ranking Iranian officials were also reportedly killed in the strikes.
Moreover, U.S. forces reportedly sank nine Iranian navy ships and “largely destroyed” Iran’s naval headquarters. Iran reportedly retaliated by striking various sites across the Middle East, including U.S. military bases.
These are major acts of war, so there can be little doubt that this military action will affect the U.S. stock market (and likely those of other countries) beginning on Monday.
Image source: Getty Images.
What will be the overall magnitude and length of the effect on the stock market?
The overall magnitude and length of the effect on the stock market of the U.S. war with Iran will depend on how investors and traders view the potential longevity and severity of the military action.
If it’s generally believed that the action will be relatively short-lived and limited in scope, the effect on the market should not be that severe or long-lasting. However, if investors are concerned that this war will intensify and drag on for an extended period, the overall market could be notably affected for some time.
Monday could be a challenging day for stocks in general. On Sunday at 8:24 p.m., stock index futures are down: Dow futures are down 0.73%, S&P 500 futures are down 0.61%, Nasdaq 100 futures are down 0.59%, and Russell 2000 futures are down 0.89%.
The oil market and oil stocks
Select oil stocks are likely to get a boost, at least in the short term, from the war with Iran. Indeed, West Texas Intermediate (WTI) crude oil futures have surged 5.5% to $70.73 as of 8:19 p.m. ET on Sunday.
This surge is due to fears that this war will disrupt the world’s oil supply. Ships — including oil tankers — have been avoiding the Strait of Hormuz since the conflict began. Iran has threatened to officially close this waterway, which is the world’s most important oil export route, through which about 20% of global oil passes, the BBC reported. The Strait of Hormuz, which Iran borders to the north, is the only sea passage from the Persian Gulf to the open ocean.
Defense stocks
Select defense stocks could also get a boost from the war with Iran.
I’m not implying that investors should buy defense stocks solely because of the attacks on Iran and that country’s retaliatory attacks. Defense stocks were already an attractive sector before the start of this war. That’s because NATO countries, particularly the European countries, began significantly increasing defense budgets earlier this year.
In April, I highlighted the Global X Defense Tech exchange-traded fund (ETF) (SHLD +0.70%) as an attractive way to gain exposure to European defense stocks, given its strong sector weighting. Investing in such an ETF is less risky than investing in an individual stock.
This ETF’s top 5 holdings, as of Feb. 27, were Lockheed Martin, RTX Corp, General Dynamics, Rheinmetall, and Palantir Technologies.
Since the article was published just under 11 months ago, the Global X Defense Tech ETF has returned 72.8% through Friday, Feb. 27. The S&P 500 has returned 37.4% over this period. I still believe this ETF is a good buy and will be a long-term winner.
Global X Funds – Global X Defense Tech ETF
Today’s Change
(0.70%) $0.52
Current Price
$74.86
Key Data Points
Day’s Range
$73.85 – $75.06
52wk Range
$42.01 – $78.49
Volume
1M
Gold and silver stocks
Gold and silver stocks, which have already been massive winners over the last year, could also get a lift from the U.S. war with Iran. Indeed, as of 8:19 p.m. ET on Sunday, gold futures are up 2%.
During times of uncertainty and geopolitical conflicts, precious metals are viewed as “safe havens.”
A “de-risking” of stock portfolios
This week, investors could see a rotation out of higher-risk stocks and into safer, less volatile ones. This will probably mean that smaller stocks, relative to larger ones, and tech stocks in general will be under pressure.
I should say tech stocks could be under “additional” pressure. They’ve recently been under pressure as investors are concerned about the sustainability of the soaring demand for artificial intelligence (AI) chips and other infrastructure to enable AI capabilities. Indeed, AI chip and related tech leader Nvidia (NVDA 4.43%) posted a stellar quarterly report last Wednesday. Yet, Nvidia stock dropped 5.4% on Thursday and 9.4% over the two days through Friday.
Some investors could rotate into utility stocks, which are often seen as safe havens alongside gold and silver. Water stocks, in particular, could garner increased investor interest. Stocks of well-established dividend-paying consumer giants might also draw more investor dollars.
What should an investor do?
Day traders and other short-term traders like volatility because it presents the potential to make more money by frequently buying and selling stocks. Those folks will likely welcome any war-driven volatility.
However, if you’re a long-term investor, you should likely stay the course, so to speak, because stocks will eventually bounce back even if they take a hit over the short term.
That said, more conservative investors or those unnerved by volatility might want to “de-risk” their portfolios to some degree if they believe the war with Iran will be costly and protracted, as has been the case in the past with certain U.S. wars and conflicts in the Middle East.