Will the Iran war trigger a stock market crash?
There’s a strange mood in the stock market today. On the one hand, the FTSE 100 and S&P 500 are both still riding high after gaining around 20% each in the past year, despite some falls last week. Yet fears about a crash are rising.
The obvious event causing consternation is the US-Israeli military campaign in Iran. Events are unfolding quickly, but the latest as I write is that the US plans even harder strikes while Tehran vows never to surrender.
Therefore, a protracted conflict is possible. Reflecting this, the UK stock market just recorded its biggest weekly fall in almost a year.
Will the Iran war cause a huge crash?
Geopolitical instability
The stock market is no stranger to such geopolitical events, of course. Since the Second World War, there have been numerous military conflicts, occupations, and terrorist attacks. These often cause heightened volatility, but rarely a massive crash.
What’s different here is that Iran has declared the Strait of Hormuz closed to most traffic. And because this waterway handles around 20% of the worldâs oil and liquefied natural gas, the impact has been immediate as movement has stalled.
Oil and gas prices have spiked and experts fear a prolonged closure could push oil prices above $150 (from $92, as I write on Sunday, 8 March). If the blockade persists, petrol prices at UK pumps will rise sharply, jeopardising the prospects for lower interest rates in 2026.
Higher energy prices are obviously not great for many businesses, not just consumers. If the Strait of Hormuz isn’t reopened in the coming weeks, it might cause a global recession.
Fragile jobs market
Having said that, I don’t think this alone would cause a historic stock market crash. But the US economy unexpectedly lost 92,000 jobs in February, surprising analysts.
Might AI be leading to job losses? After all, many firms are using the technology to reduce headcount and operate more efficiently.
We don’t know if AI’s to blame for rising unemployment. But this issue, when combined with unstable geopolitics, could mean a seismic market crash.
Global energy ETF
In early January, I highlighted the iShares MSCI World Energy Sector UCITS ETF (LSE:WENS) as an exchange-traded fund (ETF) that could do well. Since then, it’s up 23%.
However, given current widespread volatility, I think it could have further to run. It offers broad-based sector exposure via 51 holdings, including Shell, BP, Exxon Mobil, Chevron, and ConocoPhillips. It also holds oil services companies SLB and Halliburton.
As I say, we don’t know whether AI is causing job losses. But what’s certain is that the technology isn’t going away — the AI data centre buildout will continue apace. And that means massive electricity demand required to run them 24/7.
While a speedy, hoped-for, resolution to the Iran war could see energy prices pull back sharply, I still think this ETF is worth considering today. The trailing dividend yield is 2.64%, but a spike in sector profits could lead to higher future payouts.
Foolish takeaway
Nobody knows what’s coming next. But in the coming days, I’m going to trim a few winning stocks and build up some cash just in case.
Every market downturn in history has eventually been reversed, creating lucrative opportunities for patient investors buying high-quality shares.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
