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Rising tensions in the Middle East haven't shaken the stock market yet.
Since Israel's missile strike on Iran on June 13, the S&P 500 is essentially flat. This includes a 1.0% rise on Monday in the immediate reaction to the US strikes on Iran from June 21 and Iran's subsequent retaliation. Futures tied to the major US stock indexes pointed higher on Tuesday too, amid hopes that a US-brokered ceasefire between Israel and Iran could lay the groundwork for a more permanent end to hostilities.
Largely, strategists have argued that as long as their response doesn't imminently threaten to significantly spike oil prices, large pain in stocks isn't expected.
But even if there is eventually some downside action for stocks, history says it likely wouldn't be long-lasting. In a note to clients on Monday morning, Morgan Stanley chief investment officer Mike Wilson analyzed more than 20 geopolitical shocks that have hit markets since 1950.
On average, the S&P 500 was up 2% the month after geopolitical tensions spooked markets, 3% over the next three months, and 9% over the next 12 months, per Wilson's work.
"History suggests most geopolitically-led sell-offs are short-lived/modest," Wilson wrote. "Oil prices will determine whether volatility persists."
As they say, past performance is no indicator of future results. And there are clear risks to consider amid the current conflict, first and foremost, how a large spike in oil prices could potentially boost inflation and weigh on both business and consumer spending. There's also a concern that angst over further escalation could hurt investor and consumer sentiment, which had finally started to rebound from their April lows.
Both of these concerns meet a market that's already near record highs, with many stocks already richly valued, adding to the unsettling nature of the conflict for investors.
But typically, WTI crude oil prices would have to rise at least 75% compared to the prior year to have a significant negative impact on stocks, per Wilson's work. In the current scenario, this would require oil to hit about $120 a barrel, a far cry from WTI's sub-$71 level seen on Monday.
The key way many strategists have reasoned that oil could see such a spike would be driven by Iran closing the Straight of Hormuz, where 20% of the world's oil supply passes through. But after some reports that Iran's counterattack could be a sign of peak escalation in the conflict, odds of a Straight of Hormuz closure by the end of July hit 11% on Monday, well off the recent high of 52% seen on Sunday, on online betting platform Polymarket.
