What the Current U.S.-Iran Tensions Could Mean for Asset Allocation: Lessons from past Conflicts

The opening days of 2020 saw the news dominated by coverage of the U.S. attack on Iranian Major General Qasem Suleimani, with markets focused on the attack's implications and Iran's response. As of writing, U.S.-Iran hostilities appear to have stabilized for the time being, with Iran facing domestic protests following its admission that it mistakenly shot down a Ukrainian airliner.

In light of these circumstances, we look to prior instances of U.S. military involvement in the Middle East and subsequent performance across U.S. equities, crude oil, gold, 10-year yields, and the U.S. dollar. Specifically, we analyze the days following the 1986 U.S. bombing of Libya, the 1990 inception of the First Iraq War (Gulf War), and the 2003 American invasion of Iraq. Our findings are summarized in the table below.

S&P 500 – Neutral

The events we examined resulted in limited and mixed impact on U.S. equities markets. Equity prices dropped steeply after the Gulf War started but remained neutral after the U.S. bombing of Libya and actually rallied after the American invasion of Iraq. On average, equities waffle sideways for about half a year then resume its upward trend. Please note the chart below counts trading days.

Source. Orthogonal, Reuters.

WTI Crude Oil - Short-Term Bullish

Our examined events resulted in a strong short-term rally in crude oil but no lasting impact. On average, the initial rally begins to peter out by around the 50th trading day following the initiation of conflict, peaking at +35%. Please note the chart below counts trading days.

Source. Orthogonal, Reuters.