Managing Increased Uncertainty in the Middle East

The recent escalation of tensions in the Middle East, particularly following U.S. military actions in response to the ongoing conflict between Israel and Iran, has understandably raised a variety of concerns among investors. At Coldstream, we are committed to keeping you informed about important developments, their potential impact on financial markets and how we can navigate uncertainty together while staying focused on your long-term financial goals.

Current Situation in the Middle East

On June 21, 2025, the United States conducted “Operation Midnight Hammer,” a series of targeted airstrikes against three Iranian nuclear facilities: Fordow, Natanz, and Isfahan. This action followed Israel’s “Operation Rising Lion”: deep strikes against Iranian nuclear, missile, and energy infrastructure which began in mid-June, and Iran’s response, missile and drone attacks targeting Israeli territory and a threat to disrupt oil supplies through the Strait of Hormuz, a critical chokepoint for global oil trade. As of June 22, 2025, the conflict between Israel and Iran continues, with both sides exchanging strikes. Iran sent a missile attack on June 22, telegraphed in advance, against a U.S. air base in Qatar, in retaliation to the U.S. strikes. All missiles were intercepted, and little damage was done. This largely symbolic show of force from Iran suggests that it may be seeking an off-ramp away from escalation. The global community is carefully monitoring Iran’s next steps.

The U.S. has bolstered its military presence in the region, deploying naval units, air refueling platforms, and missile defense systems to reinforce Israeli defense. The administration appears to be prioritizing diplomatic efforts to de-escalate the situation. Iran’s threats to disrupt shipments through the Strait of Hormuz, which handles approximately one-third of global petroleum shipments, have heightened concerns.

Market Reactions to the Escalation

The immediate market response has been cautious but notably measured. This suggests that while tension is palpable, the market is not signaling systemic distress.

Below is a summary of the key market movements as of June 22, 2025:

• Oil Prices: While WTI crude initially rose following the U.S. strikes, it has since retreated from its opening levels and remains below the June 13th highs seen after the initial Israeli-Iranian exchanges. Brent crude also traded higher before paring gains. Historically, reactionary spikes in oil prices due to geopolitical events often tend to be sold off as the initial shock subsides. JPMorgan Asset Management estimates that for every $10 increase in oil prices, the Consumer Price Index (CPI) increases by approximately 0.3% (JP Morgan Weekly Market Recap June 16, 2025), highlighting a potential inflationary risk. However, it’s important to note that the U.S. is less exposed to oil shocks than in previous decades, partly due to its growing status as a net energy exporter.
• Equities: U.S. equities (S&P 500 Index) have seen a modest decline of just over 1% since the conflict began last week. As markets opened on Monday, June 23^rd, the first look at trading following the U.S. strikes, the S&P 500 opened in positive territory, gaining approximately 0.5% at the start of trading. The VIX (Volatility Index), a measure of market volatility, rose to around 21, indicating heightened but still contained investor uncertainty.
• Safe Havens: Activity in traditional safe havens like the U.S. dollar, U.S. Treasuries, and gold suggests that investors are feeling cautious but not rushing urgently to safety. The dollar has strengthened modestly but has not acted as a strong expression of macro safety in recent weeks. Bond yields are inching down as some nervous money shifts toward U.S. Treasuries.

Historical Context: Markets and Geopolitical Shocks

Historical data provides valuable perspective on how markets typically respond to geopolitical events. While initial reactions often involve a spike in volatility, markets tend to stabilize unless the economic or political fallout becomes systemic. For example:

• 2022 Russia-Ukraine Invasion: Oil prices peaked seven days after the invasion but later retreated as supply concerns eased.
• 1990 Gulf War: Crude oil rallied from August to October 1990 but fell below pre-invasion levels by the start of Operation Desert Storm in January 1991.
• 2003 Iraq War: Oil prices sold off at the war’s onset, bottomed in April, and only surpassed 1990 highs in 2004.

These patterns suggest that while oil price spikes and equity market dips are common, they are often short-lived. The current market response, with modest declines in U.S. equities and contained volatility, so far aligns with this historical precedent.

Source: Strategas

Source: Strategas

Potential Outcomes and Market Implications

The trajectory of this conflict could lead to potential divergent outcomes:

• De-escalation Scenario: A path toward diplomacy or significant political shifts in Iran could reduce regional tensions. This might lead to a relief rally in equities and a normalization of commodity prices, including crude oil and gold.
• Escalation Scenario: Conversely, continued conflict—particularly if involving direct targeting of U.S. or Israeli assets—could heighten market volatility. A closure of the Strait of Hormuz, even temporarily, would likely drive oil prices higher, impacting global markets. Other scenarios, including asymmetrical attacks (e.g., cyberattacks or terrorism) or contagion, in which nations like Russia or North Korea align with Iran to provide military or economic support, could intensify global uncertainty. However, historical precedent demonstrates that the U.S. economy is generally highly resilient to geopolitical shocks, with limited long-term systemic economic fallout.

Coldstream’s Framework for Navigating Geopolitical Volatility: Maintaining a Long-Term Perspective

At Coldstream, our approach emphasizes thoughtful adjustments paired with an unwavering focus on your long-term objectives. The current environment, while adding a layer of complexity, does not alter our core philosophy.

• Diversification is Key: Your diversified portfolio is intentionally structured to withstand periods of geopolitical turbulence. By strategically balancing risk and opportunities across various asset classes, sectors, and geographical regions, your portfolio is crafted to maintain resilience during times of uncertainty. This diversification reduces the risk of short-term volatility disrupting your ultimate financial goals.
• Discipline Over Emotion: Dramatic headlines can heighten emotional responses and tempt quick reactions. However, history consistently shows that rapid decisions driven by short-term news often undermine long-term investment success. Our proactive, rather than reactive, approach carefully positions your investments to endure periods of uncertainty without losing sight of broader strategic objectives.
• Historical Resilience: A historical lens suggests that past regional conflicts often prompt brief market jitters before investors “sift through the noise,” unless political or economic damage becomes systemic.

Conclusion

The escalation in the Middle East introduces heightened uncertainty, but history suggests that markets are resilient in the face of geopolitical shocks. By maintaining a diversified portfolio and a disciplined, long-term approach, we believe you are well-positioned to weather this period.

At Coldstream, we remain dedicated to guiding you through these challenges with the same expertise and care that has defined our relationship. Should you have specific concerns about how these developments might impact your portfolio, we encourage you to reach out to your Wealth Manager. Whether you prefer a brief discussion or an in-depth portfolio review, our team is committed to providing you with clarity and reinforcing your confidence in the strategy designed to achieve your goals. Coldstream has guided clients through uncertain periods in the past, and we remain dedicated to doing so now with the same careful consideration, discipline, and expertise.

Thank you for your continued trust in Coldstream. We look forward to supporting you through this time and beyond.

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