Late last week, Israel launched airstrikes aimed at Iranian nuclear capabilities which ignited a military conflict between the two nations. Many wonder how this conflict will impact the price of oil as well as the overall US economy and markets. JP Morgan, one of the Portfolio Strategists we utilize for client accounts, addressed these issues wrote in this past Monday’s Weekly Market Recap…
Late last week, Israel launched airstrikes aimed at Iranian nuclear capabilities. In response, gold prices surged as investors fled for safety while oil prices, given that Iran produces about 4% of global oil supply, surged over 7%. From an economic perspective, this comes at an interesting time. Weaker energy prices have been a steady source of disinflation amidst elevated tariff uncertainty. In May, for example, the 3.5% year over year decline in energy prices helped lower headline CPI inflation by about 0.25%. However, the recent oil spike may leave investors wondering how the economic backdrop could evolve from here?
Oil shocks are often considered stagflationary. Higher oil prices weigh on economic activity by slowing consumption while also stoking inflation. In fact, we estimate that every $10 increase in the price of WTI adds about 0.3% to CPI inflation. Oil prices are lower on a year-over-year basis, even after the recent spike. However, the upside risks to inflation could grow greater the longer this conflict persists. From a growth perspective, the United States is less exposed to oil shocks than it once was. Whereas U.S. oil imports reached as high as 3.1% of GDP in the early 1980s, the U.S. is now a net exporter of oil. As a result, any hit to consumers’ disposable incomes should be offset by higher revenues for U.S. oil producers, allowing the U.S. economy to meander along until fiscal stimulus kicks in in late 2025 or early 2026.
For investors already grappling with policy uncertainty, elevated tensions in the Middle East add an extra layer of complexity. In a time of increased uncertainty, investors must remember to stay the course. Diversification across stocks, bonds and alternatives can help investors stay invested, and better prepare portfolios for any headwinds that may lie ahead.
