What Does Conflict in the Middle East Mean For Stock Markets?

Events are moving fast in the Middle East, and it’s important to understand what the escalating conflict could mean for stock markets.

While geopolitical events can understandably create uncertainty, it’s helpful to step back

and understand how markets typically assess these situations. Often, investors en masse

tend to react quickly. That overreaction causes an abrupt stock market pullback, while

investors consider the potential economic consequences.

It’s important to distinguish between a pullback and a bear market. A bear market is

typically defined as a decline of 20% or more in equity markets. Historically, bear markets

tend to occur when the economy enters a recession.

This means that when markets initially sell off on geopolitical headlines, investors are

usually asking one simple question: could this event trigger a recession?

What causes recessions?

While recessions can have many contributing factors, they are typically triggered by one of

three shocks:

• Financial shock - disruption to bond markets or banking systems

• Policy shock - aggressive interest rate rises that slow economic activity

• Energy shock - a sustained surge in oil prices that squeezes consumers and businesses

As conflict has intensified in the Middle East and oil tankers have been prevented from sailing, the oil price has risen sharply. $100 per barrel is a key threshold. After the oil price

surged past that level, it was announced that G7 finance ministers would meet to discuss

potentially releasing supplies from their strategic reserves, which helped to ease the price

rises.

The oil price that could trigger a recession

In the chart below, we’re looking at the economic impact of oil prices. Economists often use

a simple rule of thumb – every $10 increase in oil prices tends to add around 0.3% to inflation and subtracts around 0.3% from US economic growth. Using a baseline of the US

economic growth (as measured by gross domestic product or GDP) of around 2.2% in

2025 provides a useful starting point for our analysis.

The chart shows that even with the oil price around $100, growth would remain positive.

However, if oil were to move up to around $130 per barrel and remain at that level for an

extended period, the drag on growth could become large enough to push the world’s

largest economy towards recession territory. This is why markets pay such close attention

to sustained oil price shocks. It’s worth emphasising, though, that the oil price currently

remains below the $130 level.

It’s also worth underlining that the chart is designed to illustrate in very broad terms how

the oil price can affect economic growth, rather than being an attempt to pinpoint the exact

level that would trigger a recession. The reality is that the global economy has historically

proven to be more resilient to oil shocks than simple models might suggest.

The G7 talks about releasing supplies from their strategic reserves, which underline that

governments have tools available to help stabilise energy markets. In addition, central

banks can support economies by lowering interest rates if higher energy prices begin to

slow growth.

An important point to emphasise is that geopolitical tensions can de-escalate just as

quickly as they escalate, and historically, oil prices have often fallen just as quickly as they

rose once tensions began to ease.

Key takeaway

For investors, it’s worth remembering that while stock markets often react quickly to

headlines, the global economy usually takes a much bigger shock to truly change course.

Oil prices are still some way off recession-triggering levels, and the economic backdrop

remains resilient.

This means what’s happening in markets currently looks more like a typical geopolitical

pullback, rather than the start of a bear market. 

We appreciate, though, that market volatility can be unsettling. The important thing is to maintain a long-term perspective to navigate these periods.

Need Help With Your Portfolio?

Reach out to us at any time if you would like an independent overview of your current

portfolio, or if you are simply searching for investment ideas as to how best to invest your

cash, including fixed-term guaranteed rates of up to 6.1% p.a. in US Dollars.