Could the Dow Jones Withstand Iran War after Trade War?

  • The Dow Jones Industrial Average Index and the S&P 500 futures are in the red today amid an escalation in US and Iran tensions. After the US-led drone strike killed General Qassem Soleimani, Iran retaliated by attacking US military bases in Iraq.
  • Since 2018, trade war risks have spooked investors. In December, trade war fears subsided when the US and China agreed to phase one of the trade deal. While stock markets withstood the trade war, are they prepared for a military flare-up between the US and Iran?

Dow Jones Index and the S&P 500

The Dow Jones Index and the S&P 500 futures are pointing to a weak opening today amid US and Iran tensions. Iran hit US military bases in Iraq. The country retaliated after General Qassem Soleimani was killed in a US-led drone strike. Notably, Iran was expected to retaliate. Hitting US interests in the Middle East was the most apparent option. However, by limiting the strike only to Iraq, Iran has kept the conflict limited.

Iranian Foreign Minister Javad Zarif tweeted, “Iran took & concluded proportionate measures in self-defense under Article 51 of UN Charter targeting base from which cowardly armed attack against our citizens & senior officials were launched.” He also said, “We do not seek escalation or war, but will defend ourselves against any aggression.”

President Trump on the attacks

The Dow Jones Index fell on January 6 after the news of Soleimani’s death. However, markets recouped the losses on Monday. After Iran attacked US military bases, President Trump tweeted, “All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far!”

President Trump also said that he would make a statement this morning. While the conflict is still in nascent stages, the situation remains fluid. The presidential election is scheduled for later this year in the US. If the US retaliates against Iran’s strikes with military operations, it might lead to more escalation and a possible war with Iran. Democratic presidential candidate Joe Biden said that the current escalation is “bringing us dangerously close” to a war with Iran.

Dow Jones withstood the trade war

The Dow Jones Index (NYSEARCA:DIA) whipsawed over the last two years amid the trade war. The Dow Jones Index and the S&P 500 (NYSEARCA:SPY) fell whenever there was an escalation in the US-China trade war. Last year, US stock markets sold off in May and August amid the trade war escalation. In December 2018, President Trump’s “Tariff Man” tweet spooked investors and the Dow Jones Index tumbled after the tweet. In the fourth quarter of 2019, optimism about phase one of the trade deal lifted the Dow Jones and the S&P 500. As a result, both indices made record highs.

Can stock markets withstand a real war?

Now, despite the volatility over the last two years, US stock markets rose to record highs last year partially due to phase one of the trade deal with China. Several economists predicted a market crash and even a recession due to the trade war. However, barring periods of sell-offs, stock markets weren’t impacted much after two years. Can the Dow Jones Index withstand a real war after the trade war?

First, in trade conflicts, economics prevails in most of the scenarios. From seeking a perfect trade deal with China, the Trump administration decided to split the deal into phases. Notably, the trade war hurt the US and the Chinese economy. Both countries would benefit from reaching a middle ground.

Would the Dow Jones crash?

However, a real war complicates the situation. After Iran’s strike, the ball lies in President Trump’s court now. We’ll get more clues after President Trump’s statement today. If the US retaliates, it could spook markets and lead to a sell-off in the Dow Jones. President Trump might impose even harsher economic sanctions on Iran, which would cripple its already sagging economy. Read Could US Iran Tensions Impact US Stock Market Investors? to learn more.