Tensions in the Middle East have escalated following a surprise attack by Israel on June 13th that targeted Iranian nuclear facilities and military leadership, plunging both countries into a period of direct conflict. While the reaction from global leaders has been mixed, the U.S. administration continued to pressure Iran to surrender the country's nuclear ambitions.
The U.S. military subsequently entered the conflict by deploying sophisticated technology to target sites in Iran believed to be related to uranium enrichment and the development of nuclear weapons. As at the time of writing, a fragile ceasefire has been agreed, however many questions remain unanswered. In this article, we provide some perspective on the recent developments, along with important insights to help investors remain on track with their long-term goals and objectives.
Energy Markets in Focus
Energy markets are one area which have been quick to respond to heightened regional tensions. The price of WTI Crude Oil surged by over 10% in the days immediately following the outbreak of renewed conflict, before unwinding on signs of de-escalation.
Worries so far have centered on the potential for disruption in the production and supply of crude oil. It's estimated that about a third of the world’s seaborne oil supplies pass through the Strait of Hormuz, a narrow waterway which separates Iran from neighboring gulf states. Any act of retaliation or escalation which targets this shipping route could have ramifications on geopolitical tensions and energy markets.
While oil may represent a key means of transmitting Middle East tensions to global financial markets, it's important to note that the broader economic impact of such a price shock today is much lower than in preceding decades. According to FactSet, for example, it took 2.8 barrels of oil per day to generate $1 million of U.S. GDP back in 1975. By 2023, this figure had declined by 70% due primarily to rising industrial efficiency, faster growth of the less energy-intensive service sector and the rise of renewable energy.
The U.S. remains the largest single oil producer globally, representing around 20% to total output. Although oil prices remain subject to global supply and demand factors, the self-sufficiency of U.S. production further limits the domestic impact of energy supply shocks and uncertainty in the Middle East.
Conflict and Financial Markets
Historically, market reactions to military conflict have often been short and quickly reversed, so the probability of a more severe and protracted scenario currently remains low. As an example, the Iraq War, which began in March of 2003, initially weighed on performance of the S&P 500 Index of large-cap U.S. equities, but short-term uncertainty gave way to longer term gains, with double-digit returns in the 12-month period that followed ultimately rewarding patient investors.
From a financial market perspective, the Iraq war was not a unique period. Looking back over the last 50 years, be it the Iran-Iraq war in the 1980s, war in Afghanistan in the 2000s, or even more recently with the Russian invasion of Ukraine in 2022, the pattern of how markets respond has remained consistent.
The outbreak of conflict understandably creates a period of heightened anxiety as headlines stir emotions and tempt investors to become more cautious. Frequently, this has led to shorter term pullbacks in financial markets over the weeks and months following the onset of conflict, before longer term perspective prevailed with a renewed focus on the fundamental drivers of growth.
Market Resilience
At the height of geopolitical or market uncertainty, individuals may be tempted to make investment decisions that put their long-term financial goals at risk. In such periods it is important to keep volatility in perspective.
The S&P 500 Index has endured periods of economic stagflation, geopolitical tensions and wars, the bursting of a technology bubble, a global financial crisis and the COVID-19 pandemic. While the drivers and time periods may differ, history has shown that economies and financial markets are often more resilient than expected.
Markets May Be Quick to React, but Investors Don’t Need to Be
We've already seen periods of volatility in the markets so far in 2025, but often the biggest threat to investing success is not the source of uncertainty but how investors respond.
Conflict in the Middle East and heightened geopolitical tensions are likely to create continued headline risk and periods of volatility. Markets may be quick to react, but investors don’t need to be. The chart below shows the value of $100,000 over 30 years for an investor fully invested in the S&P 500 Index during that period, compared to investors who had missed the 5, 10 or 20 highest returning days. Oftentimes, strong up days for equities follow substantial down days.
Historically, investors who have focused on a long-term plan have achieved greater outcomes by not missing those days.
Final Thoughts
TD Wealth continues to take a risk-managed, high-quality approach to investing. While the type of conflict and geopolitical tensions we've seen recently can create a significant amount of uncertainty, it is important for investors to continue focusing on their long-term investment plan.
Periods of heightened volatility can also serve as an important reminder of the benefits of a diversified portfolio. Maintaining thoughtful and well-balanced exposures to a wide range of asset classes, sectors and geographical regions can provide investors with the opportunity to benefit from multiple drivers of return, regardless of the market environment. It is our belief that this approach will continue to serve investors well in helping to ultimately achieve their longer-term financial goals and objectives.
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