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How Iran’s ‘Severe Retaliation’ Could Strike the US Stock Market

Last Updated September 23, 2020 1:27 PM
Laura Hoy
Last Updated September 23, 2020 1:27 PM
  • An Iranian response is likely to hang over the market for years to come, but investors are likely to settle down in the near-term.
  • The stock market’s inflated valuations may make a rebound more laborious.
  • Oil prices and the industries they impact offer the best contrarian plays at present.

The US is awash with speculation on how Iran will retaliate to the US airstrike that killed Qassem Soleimani . The news of Soleimani’s death took stock markets markedly lower and caused investors to flee for safe-haven investments.

Investors fear that Iran’s response  will have an even greater impact on the US stock market in the months ahead.

Iran Will Play the Long Game

how iran's retaliation will affect the stock market
Increased violence in the Middle East led by Iran-backed militia is the most likely outcome. | Source: Ali DIA / AFP

The most likely outcome is a rise in conflict with Shiite militia groups in Iraq. These fighters could target US officials and civilians in Iraq and throughout the Middle East.

Iranian President Hassan Rouhani likened Soleimani’s killing to the 1953 US-led coup against Iran’s government , which eventually led to 52 US diplomats being taken hostage for more than a year. 

That particular incident holds a few takeaways for traders trying to predict how Iran’s response will impact the US stock market.

The most important is timing. The US helped overthrow Iran’s democratically elected government in 1953; the hostage crisis took place in 1979. Several other US actions fueled Iranian hostility toward the US, but it’s worth noting that in this case, the retaliation came more than two decades later. 

Oil prices have historically spiked during Middle East crisis events. | Source: CNBC 

Historically, financial markets recover swiftly after news of rising tension in the Middle East. CNBC analyzed the market’s reaction  to 20 crises spanning 30 years and found that while stocks initially drop, they make their way higher in the following three months. 

The shock the US stock market received on Friday will likely wear off in the coming days if Iranian officials bide their time. Further conflict, if confined to the Middle East, is likely to have a similar impact on US financial markets.

Nuclear Retaliation Likely

Though Trump abandoned the Iranian nuclear agreement in 2018, the nation hasn’t deviated far from the agreement’s terms. In the wake of this week’s attack, Iran probably won’t continue exercising that kind of restraint .

In the coming weeks, Iran could start to take significant steps toward creating weapons-grade uranium. It could also kick inspectors out of its facilities and abandon its other nuclear agreements. 

Either of those actions would represent a dangerous step toward nuclear weapons, but they don’t necessarily make Iran immediately dangerous as a nuclear threat.

Still, that kind of uncertainty would take a toll on the US stock market – at least temporarily. Consequently, it could offer an attractive entry point for investors. 

Oil Prices Spike and Drive Stocks Down

how us-iran hostilities will affect oil stocks
The Iranian conflict will likely have the most direct impact on oil prices. | Source: REUTERS/Essam Al-Sudani/File Photo

There’s also a chance Iran could target oil fields in southern Iraq, a move that would significantly reduce OPEC’s capacity because Iraq is the organization’s second-largest producer. According to Eurasia Group analyst Henry Rome, that scenario could send oil prices above $80 per barrel .

What does that mean for stocks? It depends.

Airline stocks are a typical casualty when oil prices rise. But the belief that airlines are heavily impacted by oil price fluctuations is antiquated. The price of fuel is a factor for airlines, but the demand for seats is the main driver of profitability . 

Airline stocks took a hit Friday as oil prices rose. |Source: Yahoo Finance 

For oil stocks, movement is dependent on how sensitive the firm is to crude prices. Big producers like Chevron (NYSE: CVX) and Exxon (NYSE: XOM) won’t see the same boost as smaller producers because of their diversified operations. Refiners will see a drop as crude prices rise. 

Oil stocks spiked Friday on news of the Iran strike. | Source: Yahoo Finance 

According to RBC Capital Markets’ Scott Hanold , traders who want to benefit from rising crude prices but keep out of the wild swings will opt for large-cap oil producers or those with limited or no exposure to the Middle East like Devon Energy (NYSE: DVN) or EOG Resources (NYSE: EOG)

Healthcare, Social Media and Financial Stocks Under Cybersecurity Threat

This weekend, Iranian hackers replaced a government website  with threats of revenge for Soleimani’s killing.

While the incident did very little damage since it impacted the little-known Federal Depository Library Program, it could be the start of Iranian hackers targeting US websites. While the government makes for an obvious target, corporations are likely to be under threat as well.

While Iran has the ability to impact important infrastructure within the US, a serious attack is unlikely because of the repercussions. 

With that in mind, Iran’s cyberattacks still add a layer of uncertainty to US financial markets. According to cybersecurity firm Check Point, the industries most likely to be targeted  are healthcare, financial services, and social media because of their potential to create compelling headlines.