Introduction

Overnight (June 21, 2025) U.S. bombers struck three sites in Iran alleged to be their main nuclear sites, escalating tensions in the Middle East and pulling the U.S. directly into a new conflict despite President Trump’s earlier promises to avoid any new wars. Leaving aside any political views on this action, I want to quickly (without taking time to include images and colorful interludes to break up the text!) give readers some thoughts on what we might expect in markets, who will undoubtedly see this as uncertainty, moving into Mondays global opens.

As financial markets prepare to open on Monday, June 23, 2025, investors should generally brace for the potential volatility these sorts of actions usually bring. This article examines how markets have historically reacted to U.S. missile attacks on other countries, drawing on specific conflicts of varying duration to provide insights into what Monday’s open might look like and key considerations for managing portfolio risk in the short and medium term if the conflict with Iran persists.

Will it persist? We don’t know, is the answer, so we identify the tails and manage risk as best we can.

As an aside, growing debt (to expand an economy) during a conflict can be relatively straightforward for nations with strong credit and reserve currency status. For the U.S., adding debt during wartime has often been convenient due to its economic dominance and ability to borrow. It is then somewhat convenient that at a time where the administration has been posturing to do just that, expand the national debt significantly, that a conflict has arisen. We can never know the inner workings of the political mind and that’s not our job as investors anyway, but from a risk perspective the coincidence shouldn’t be lost on us and we may anticipate an elongated timeline here if indeed this risk materialises (a foreign conflict to aid in local debt expansion).

Executive Summary

U.S. military actions, particularly missile strikes, often trigger immediate market reaction driven by uncertainty, geopolitical risk premium, and shifts in investor sentiment resulting from both. However, the magnitude and duration of these reactions depend on the conflict’s scope, economic implications, and whether it escalates into a broader war quickly.

Equities: Anticipate a risk-off move at the open, with U.S. stock futures already down following the strikes. The S&P 500 could decline 1-3%, with deeper losses possible if Iran retaliates against the U.S. or disrupts oil flows. European and Asian markets (e.g. Kuwait, Oman) have already opened marginally lower. Defensive sectors (utilities, consumer staples) and defense stocks (Lockheed Martin, RTX) may outperform, while cyclical sectors (technology, industrials) could lag.

Cryptocurrency: Generally follows equities from a risk on perspective with uncertainty likely to impact investor sentiment. But price has been fairly stable on Sunday (cryptocurrency is a 24×7 market) following Saturdays drawdown (front running?) and as a global asset class not beholden to any government or state actor it’s possible this is a scenario in which Bitcoin is considered something of a safe haven. For what it’s worth I don’t see it this way and would anticipate a move in line with whatever equities do on Monday, with longer term price dependent on reaction and further escalation.

Oil: Brent crude has already surged 10% to $75.15/barrel, with potential to hit $80 if tensions persist. A worst-case scenario involving a Strait of Hormuz blockade could push prices above $100/barrel. Energy stocks (Exxon, Chevron) are likely to rally, but airlines (Delta, United) may face pressure from rising fuel costs.

Safe-Havens: Gold has rallied recently so no change here, but the U.S. dollar may strengthen as a safe-haven asset if the conflict doesn’t escalate and US stability isn’t questioned by global investors. U.S. Treasuries, particularly 10-year notes, should see demand in this scenario, potentially lowering yields temporarily as demand drives up price. This would be a welcome outcome for US policymakers.

Volatility: The Volatility Index (VIX) is likely to spike, reflecting heightened uncertainty. High-yield credit spreads may widen modestly, signaling risk aversion.

Overall: In general terms, when the US enters conflict markets generally react negatively to the uncertainty early on, so we should anticipate drawdown in risk, upticks in safe havens and potential yield volatility on Monday. Whether these become prolonged depends entirely on what happens next geopolitically.

Beyond Monday

Historical data suggests markets should stabilise within days if the conflict remains contained, as seen in 1998 and 2017. However, direct U.S. involvement and Iran’s strategic position increase the risk of prolonged volatility compared to past Middle East strikes. The perception of a joint campaign with Israel is drawing attention and while I hold no opinion on this dynamic I have to acknowledge it a risk given press coverage and general sentiment on Sunday.

Short-Term Risk Management (1-4 Weeks)

1. Monitor Geopolitical Developments:
   • Key Triggers: Watch for Iran’s response, particularly attacks on U.S. assets or attempts to disrupt the Strait of Hormuz. U.S. military involvement beyond the initial strikes could escalate market fears so we should watch for this too.
   • De-escalation Signals: Diplomatic efforts, such as Iran restarting nuclear talks (as reported on June 16), could calm markets.
2. Consider Rebalancing Portfolios (but for now I won’t be doing this as pretty well positioned for it):
   • Increase Safe-Havens: Allocate to gold (target price: $3,500-$3,800/oz) and U.S. Treasuries to hedge volatility.
   • Defensive Sectors: Overweight utilities, healthcare, and consumer staples, which tend to outperform during geopolitical shocks.
   • Energy Exposure: Consider selective exposure to energy stocks, but avoid overcommitting due to potential price retracement if supply disruptions are avoided.
3. Assess Sector Impacts:
   • Winners: Defense and Energy stocks benefit from heightened tensions.
   • Losers: Airlines, Tourism, and Consumer Discretionary sectors face risks from higher oil prices and reduced travel.

Medium-Term Risk Management (1-6 Months)

If the U.S.-Iran conflict escalates into a prolonged engagement, investors must prepare for sustained volatility and macroeconomic shifts. Key considerations include:

1. Inflation and Oil Prices:
   • A sustained oil price spike (e.g., $100+/barrel) could raise global inflation by 0.4% per 10% oil price increase, limiting central banks’ ability to cut rates. The Federal Reserve’s next decision (June 25, 2025) will be critical.
   • Overweight inflation-resistant assets like TIPS (Treasury Inflation-Protected Securities) and commodities (energy, agriculture).
2. Economic Growth Risks:
   • A prolonged conflict could slow global growth, with the IMF forecasting a 0.5% drop in 2025 due to trade tensions and potential energy disruptions.
   • Diversify into markets less exposed to Middle East risks, such as U.S. domestic-focused small caps or emerging markets like India.
3. Sector Rotation:
   • Beneficiaries: Energy, Defense, and Industrial firms involved in reconstruction (post-conflict) could outperform.
   • Underperformers: Cyclical sectors (Technology, Financials) may struggle if growth slows or inflation rises.
4. Currency and Safe-Havens:
   • The U.S. dollar’s safe-haven status could persist, pressuring emerging market currencies.
   • Maintain gold exposure as a long-term hedge, as prices could exceed $3,800/oz in an escalation scenario.
5. Historical Resilience:
   • Markets have historically recovered within 6-12 months of geopolitical shocks, with the S&P 500 averaging 7.8% gains 12 months post-event. Avoid emotional overreactions and maintain disciplined allocations.

Key Historical Examples

Vietnam War (1960s–1970s)

• Stocks: The S&P 500 was volatile, with inflation and war costs contributing to stagflation. Equities struggled in the late 1960s and early 1970s.
• Bonds: Treasury yields rose due to inflation pressures, peaking at ~8% by the mid-1970s.
• Commodities: Gold prices surged after the U.S. left the gold standard in 1971; oil prices spiked during the 1973 OPEC embargo, partly tied to Middle East tensions.
• Dollar: Weakened as war costs and inflation eroded confidence.

Gulf War (1990–1991)

• Stocks: Initial sell-off, followed by a strong rally post-victory.
• Bonds: Treasury yields fell as investors sought safety.
• Oil: Sharp spike, then decline as supply stabilized.
• Dollar: Strengthened post-conflict due to U.S. geopolitical dominance.

Afghanistan (2001) and Iraq (2003)

• Stocks: Short-term dips, followed by recoveries as conflicts appeared manageable.
• Bonds: Treasury yields dropped during initial uncertainty (e.g. 10-year yields fell to ~3.5% in 2003).
• Oil: Spikes during both conflicts, especially Iraq due to its oil-producing status.
• Gold: Rose steadily from ~$270/oz in 2001 to ~$400/oz by 2004, driven by geopolitical and economic uncertainty.
• Dollar: Mixed, with initial strength but later weakening due to war costs and global skepticism.

Smaller-Scale Actions (e.g. Syria Airstrikes 2017–2018)

• Markets often showed muted reactions to limited strikes, with brief safe-haven flows into Treasuries and gold, and minor equity volatility.

Factors Influencing Market Reactions

• Scale and Duration: Limited strikes (e.g. Syria 2017) cause smaller, shorter-lived market reactions than large-scale wars (e.g. Iraq 2003).
• Geopolitical Context: Conflicts in oil-producing regions or involving major powers (e.g. Russia, China) amplify market volatility.
• Economic Environment: Pre-existing conditions (e.g. inflation, recession) shape reactions. For example, the Vietnam War exacerbated inflationary pressures, hurting equities and bonds.
• Market Expectations: If military action is anticipated (e.g. Iraq 2003), markets may price in the event beforehand, reducing volatility.

Conclusion

The U.S. missile strikes on Iran have heightened geopolitical risks, and Monday’s market open is likely to reflect an initial risk-off sentiment, with equities declining, oil prices rising, and safe-haven assets gaining. Historical examples like Operation Desert Fox (1998) and the Shayrat strike (2017) suggest markets can recover quickly if the conflict remains contained, while the Iraq War (2003) highlights the potential for prolonged volatility and sector-specific impacts in extended conflicts. This gives us an area of interest to watch from a fundamental perspective as investors, though our technical slant will always provide the majority of our edge.

For subscribers, the key is to stay vigilant but disciplined. Don’t make any emotional decisions based off the news today! In the short term, monitor Iran’s response and further U.S. involvement, rebalance toward defensive assets if you feel over exposed (and only you can know or decide this, there’s never any advice here!), and hedge volatility as you see fit (again, within your own risk tolerances, no advice!).

In the medium term, if we see escalation you might prepare for inflation and growth risks by diversifying into inflation-resistant and defensive sectors.

By learning from history and focusing on risk management, investors can navigate this uncertainty and position portfolios for resilience, whether the conflict de-escalates or persists. We hope for de-escalation and progressive talks in the coming weeks, but hope is not an investment strategy, so we manage for the risks as we hope for the best.

As always, stay safe out there and “lang may yer lum reek”