What will a US-Iran war do to stock markets?

News broke early yesterday that Iran has fired missiles at US troops stationed in Iraq, in retaliation for the death of a top Iranian general at the hands of the US military. 

Could Iran's latest move escalate into a full-blown war between itself and the US? I have no idea. My heart sinks at the thought of the human lives that could be painfully ended or maimed because of any potential large-scale armed conflict. May a war not happen. The human costs are too tragic. 

But what if tensions between Iran and the US erupt and a huge battle develops? What happens to the financial markets? In this uncertain time, it's worth remembering that:

• The US experienced a recession in July 1990
• The US entered into war in the Middle East in Aug 1990. 
• The price of oil spiked in Aug 1990. 
• Ray Dalio said in early 1992 that "unfortunately… the current economic climate of low inflation and historically slow growth means that bonds will actually prove to be the better long-term performers."

But from the start of 1990 to today, the US stock market is up nearly 800 per cent in price alone (the chart below shows the price-change for the S&P 500 from the start of 1990 to early Dec 2019):

Every time I'm confronted with uncertainty in the markets, I turn to one of my favourite investing passages. It's written by Warren Buffett in his Berkshire Hathaway 1994 shareholders' letter:

[[nid:473103]]

"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.

Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8 per cent and 17.4 per cent.

[[nid:472583]]

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices.

Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results."

This too, shall pass. But again, may war not happen.

This article was first published in The Good Investors. All content is displayed for general information purposes only and does not constitute professional financial advice.