Iran war drags on, dragging down Wall Street

MANHATTAN (CN) — It has been roughly five weeks since the United States and Israel launched airstrikes against Iran.

One result: five straight weeks of contraction in the S&P 500.

Investors on Monday made a slew of so-called “TACO trades,” buying low on the belief that “Trump always chickens out” and will settle the Middle Eastern conflict. The Dow jumped about 700 points following news of potential peace talks with Iran’s leadership.

But talks of peace soured through the week — and by Friday, markets had again turned south. By closing bell, the Dow had lost 391 points for the week, the S&P 500 had fallen 138 points and the Nasdaq had shed 699 points.

Oil prices briefly dropped below $100 per barrel this week, then again began rising and settled at more than $112 per barrel by closing bell. Domestic oil prices, charted by the West Texas Intermediate, also began increasing and hit $199 per barrel at the week’s end.

Shipping traffic through the Strait of Hormuz remains halted as Iranian attacks threaten ships in the area.

After negotiations with Iran broke down and U.S.-Israeli strikes on Iran intensified, President Donald Trump has extended the deadline to reopen the strait until April 6.

Even news that 10 tankers were allowed to pass through the strait — which Trump characterized as a “gift” from Iran — did not spur any bullish sentiment from investors.

Other data this week didn’t help matters. On Friday, the University of Michigan’s consumer sentiment index fell a few more points, hitting 53.3. Indices on consumer expectations and current economic conditions also declined slightly.

“At this time, consumers appear to believe that any negative economic consequences of the Iran conflict are likely to be limited primarily to the short-run,” Joanne Hsu, the survey’s chief economist, said in a statement.

Consumers do not expect gasoline price spikes to remain, but the persistence of high prices is the dominant factor for consumer views on the economy, Hsu noted. And she warned pessimism could grow “if the conflict becomes protracted or if higher energy prices lead to meaningful, sustained increases in the prices consumers pay.”

The economic toll of the Iran war and resurgent inflation could have dire consequences later this year.

According to an analysis by economics at Oxford Economics, recession risks remain muted, but the odds of a recession have increased to 30% in the last month and now depend on the duration of the Iran conflict.

“The U.S./Israel war with Iran clouds the economic outlook, with scenarios ranging from a benign deescalation to a severe oil shock,” Matthew Martin, senior U.S. economist at Oxford Economics, wrote in an investor’s note. He added that “a prolonged period of oil prices above $140 per barrel could be enough tip the economy into recession.”

Other experts — including Mark Zandi, chief economist at Moody’s Analytics — warn that if oil prices remain high through Memorial Day, it would push the U.S. economy into a recession. His model places the odds of an economic downturn at around 49%.

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