How The Iran War Could Impact Your Finances

Unlike when the United States flew into Venezuela and captured Nicolás Maduro, the conflict with Iran has lasted longer and had a larger economic impact than many expected at the outset.

The stock market initially shrugged off the start of the conflict. Then expectations reset.

On March 3, the Dow Jones Industrial Average fell as much as 1,200 points intraday before recovering most of those losses. It wasn’t until the 5th that losses began sticking into the close.

During geopolitical shocks, the market tends to behave like this. There's an initial reaction, followed by repricing and then finally a stabilization.

While the market may recover relatively quickly, what are the long-term effects of the conflict on your finances?

Oil Prices

The biggest impact will be on oil prices.

Iran closed the Strait of Hormuz , a narrow shipping passage that accounts for 20% of the world's oil every single day. Its closure has already pushed oil prices up.

A barrel of crude oil is now over $100, the first time it has broken that level since July 2022.

Higher crude oil prices will result in higher costs for items like gasoline, diesel and heating oil. That will, in turn, increase the price of transportation of people and goods, which will push up the price of all products.

In the near term, expect higher gas prices, which have already started to move up .

Inflation

Energy costs trickle through the entire economy.

The food at the grocery store has to be transported. Products must travel thousands of miles to get to the shelf. When fuel prices go up, it impacts everything.

Expect higher prices at the store for everything you buy.

If you have any future travel plans, it might make sense to lock in flights sooner rather than later. Fuel surcharges will start showing up in ticket prices.

For your investments, inflation protection is important.

If you are in the accumulation phase, keep following your plan. If you are retirement or near retirement, you should ensure you have inflation protection built into your portfolio.

This means looking at Treasury inflation-protected securities and similar assets for your bond allocations. If you’re collecting Social Security, it has built-in inflation protection with the cost-of-living adjustment, but your other assets need a bit of that as well.

Stock Market

The stock market hates uncertainty, and wars introduce uncertainty.

Whenever there is uncertainty, volatility increases and investors tend to move from riskier assets to safer, less volatile ones.

If you’re invested in an index fund, your money is likely diversified, so you insulate yourself from these changes. If you have a long-term view, the market will likely recover before you need the money.

If, however, you are nearing retirement, then you face sequence-of-returns risk. Make sure your asset allocation is dialed in properly and that any funds you need in the next few years are invested in safer assets.

Interest Rates

With higher prices and energy-driven inflation, the Fed is likely to delay rate cuts to combat inflation. This would keep borrowing costs high, such as personal loans and mortgages, so future homeowners may not be getting a rate reprieve anytime soon.

For those near or in retirement, this could be a slight positive, as higher interest rates means better yields on certificates of deposits, Treasury bills and other safe assets.

You can always look at the CME Group's FedWatch tool to see what interest rates traders believe the Fed will do.

Psychological Risk

Wars are scary and can have a negative impact on your mental health. Be very careful about the media you consume and don't let it overwhelm you.

War dominates the news cycle and can produce a constant stream of alarming headlines, images and video.

The financial risk of this is that you react emotionally. The market is volatile, and you will see headlines of it "plunging" or "crashing," which, combined with the images and video of war, might push you to act based on emotions.

It’s important that you avoid panicking in a volatile market .

Markets often stabilize within months, but it's hard to see it with a clear head when you're consuming news about the war, especially video and photos.

Bottom Line

Wars create uncertainty, and the stock market and your finances hate uncertainty. It’s hard to plan for the future when there's a lot of volatility, but it's still something you have to do.

For now, the clearest financial impact will be in the rise in energy prices. In the short term, fuel will be more expensive. If the war lasts a long time, we will see higher prices trickle through the economy as it absorbs the higher price of fuel.

By Jim Wang, Contributor