The U.S. and Iran announced a preliminary agreement intended to end the four-month conflict that has weighed on the global economy. Financial markets have reacted positively to this development, with the stock market climbing, oil prices falling, and interest rates declining. How should investors interpret this agreement and what does it mean for portfolios?

Energy prices are the primary channel through which geopolitical conflicts affect the broader economy. The effective closure of the Strait of Hormuz, a major waterway for oil and gas, forced major Middle Eastern producers to scale back output as storage capacity filled up. However, oil prices had already begun to trend lower in recent weeks, falling more than 25% from the April peak of $118 per barrel to around $85 before the preliminary peace deal was announced.¹ History shows that while Middle East conflicts can lead to spikes in oil prices, these events tend to be short-lived. In the long run, what drives oil prices are supply and demand factors such as increased U.S. oil production. This is why economists often describe supply-side shocks as “transitory,” meaning their inflationary effects tend to fade once the underlying disruption is resolved. A reopening of the Strait of Hormuz would be an important step in that direction, even if it does take time for fuel prices to return to more normal levels.

While this creates challenges for consumers, it has also not proven to be a repeat of the post-pandemic inflationary period. Importantly, core inflation, which excludes food and energy, rose only 2.9% year over year in May. This suggests that higher oil prices have not fully spread broadly across the economy. If oil prices continue to trend lower, the hope is that price pressures will improve as well, which could help the Fed as it manages higher inflation and a strengthening jobs market.

Markets have experienced healthy gains this year across asset classes³

Beyond energy markets, many asset classes have been resilient this year. The U.S. stock market has experienced strong gains this year, with the S&P 500’s year-to-date return hovering around 10%, driven by strong earnings growth and a healthyeconomy.⁴ Bonds have also helped to stabilize portfolios during periods of volatility, even if the Bloomberg U.S. Aggregate Bond Index is essentiallyflat on the year.⁵ The 10-year Treasury yield is below 4.5% and the 30-year yield is under 5%, as both inflation and uncertainty have improved.International stocks have also performed well, continuing the trend of the past two years.⁶Many sectors have contributed to these returns, with eight of the eleven S&P 500 sectors in positive territory. Not surprisingly, the energy sector has outperformed, gaining approximately 27% year to date as higher oil prices boosted revenues for producers. Other sectors with more defensive characteristics, including Utilities and Consumer Staples, also performed relatively well as investors sought stability. Information Technology has experienced volatility due to interest rate swings, but has experienced a return of about 17.5% year-to-date.

Investors should maintain a long view on geopolitics and economic cycles

Over the past century, geopolitical conflicts, including wars, oil embargoes, and regional crises, have tested financial markets. While these events often led to short-term market swings, markets typically recovered and continued higher even when the underlying situations were not resolved. When zooming out, such as in the chart above, it’s easy to see that what drove long-term performance was not each event itself but the underlying economic and market cycles.

Advisory services offered through LPL Financial, a registered investment advisor.This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments Any economic forecasts set forth may not develop as predicted and are subject to change.References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal professional.Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions.International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.This material was prepared by Clearnomics, Inc., who is not affiliated with the named financial professional, firm or broker/dealer.

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