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.
Gold – Bullish
Our examined events were bullish for gold, with the impact peaking, on average, around six months into the conflict at around +15%. Please note the chart below counts trading days.
Source. Orthogonal, Reuters.
U.S. Dollar Index – Bearish
The flip side of gold is the U.S. Dollar index. Our examined events resulted in a weaker U.S. dollar and the effect is persistent. On average, the drop bottoms out at around -9%. Please note the chart below counts trading days.
Source. Orthogonal, Reuters.
U.S. 10-Year – Neutral
Finally, looking at 10-year U.S. Treasury yields, we find, on average, higher yields (lower bond prices) in the short term following our examined events, but little in the way of a discernable pattern. Please note the chart below counts trading days.
Source. Orthogonal, Reuters.
If conflict with Iran escalates and markets follow their typical pattern, we expect a knee-jerk rally in crude oil, a drawn-out rally in gold, and persistent weakness in the U.S. dollar. We expect U.S. equities and interest rates will be volatile but ultimately may not be sensitive.