The stock market is reeling as oil prices spike in reaction to the war between the U.S., Israel and Iran in the Middle East.The escalating conflict has caused shipping traffic through the Strait of Hormuz, which sees roughly a fifth of global oil pass through it on a daily basis, grind to a halt, causing oil prices to spike above $100 per barrel for the first time since the Ukraine-Russia war began four years ago.At last check, West Texas Intermediate (WTI) crude futures were up more than 11% at $100.99 per barrel and have surged roughly 50% since the start of the month.
"Investors were hoping cooler heads would prevail in the Iran war this weekend, and instead, tensions escalated, which is exacerbating last week's stock market declines and oil price spikes," says Carol Schleif, chief market strategist at BMO Private Wealth. "Triple-digit oil prices rapidly translate into sizable increases at the gas pump, which is a dynamic that understandably spooks investors and consumers alike, and is one of the main drivers of this risk-off sentiment."Adding to Wall Street's worries is the February jobs report, which showed an unexpected decline in payrolls last month. The risk of higher inflation from spiking oil prices and an economic slowdown has revived "stagflation" chatter and comparisons to the 1970s, when a global energy crisis following the Iranian Revolution did just that.But Eugenio J. Alemán, Ph.D., chief economist, and Giampiero Fuentes, economist at Raymond James, don't believe the stagflation comparisons hold much weight. "Yes, 'history repeats itself,' but the economic and institutional conditions underlying those historical periods were so fundamentally different that such parallels are not meaningful," they say. "To be clear: this is not a return to 1970s–80s stagflation."And, as Schleif reminds us, "stagflationary concerns were also raised in 2023 but stocks have performed remarkably well since that period."For now, though, stocks are in freefall, with the blue-chip Dow Jones Industrial Average, broader S&P 500 and tech-heavy Nasdaq Composite all poised for 1% losses on Monday, March 9. Since the start of the month, the main indexes have notched losses ranging from 1% to 3%.
What can investors do?
There's a saying on Wall Street that stocks are the only thing people don't want to buy when they're on sale. Thus, there is only one rule to follow when stocks are selling off sharply: Don't panic. Investing in the market is a marathon and not a sprint. And as we've said time and time again, wealth is built through decades, not days. As just one example, those who invested $1,000 in Microsoft (MSFT) 20 years ago would be sitting on tremendous returns today. Even though MSFT shares are down more than 16% for the year to date, the tech giant has averaged an annual return of nearly 25% in the past 10 years, outpacing the broader market by roughly 10 percentage points.Remember that the idea is to buy low. Stocks are cheaper today than they were yesterday. They might get cheaper tomorrow, but the long-term trend has always been up and to the right. That's why dollar-cost averaging works. More importantly, market corrections are normal. "While uncertainty and volatility will continue in the near term, this isn't a market falling apart; it’s a market fighting through uncertainty," says Mark Hackett, chief market strategist at Nationwide. "For long-term investors, this is part of a bottoming process and a buying opportunity, with markets likely to be meaningfully higher over the next 12 months — it just might be a fistfight to get there."Be that as it may, it's abundantly understandable if investors want to de-risk their portfolios to some degree — as long as they understand that they'll also forgo some upside once the market regains its footing.One way to protect portfolios against market volatility is to hedge with options — particularly put options — which can create a buffer against potential downside. But buyer beware: with the Cboe Volatility Index (VIX) spiking to its highest level since last spring's "tariff tantrum," the cost to buy short-term options insurance is fairly high at the moment.As for equities, investors can seek traditional safety plays. These can include the best dividend stocks, which "tend to hold up better in market drawdowns," writes Kiplinger contributor Dan Burrows. Additionally, investors can seek low-volatility stocks that "can not only help reduce losses in a downturn," writes Kiplinger contributor Kyle Woodley, but they can also prevent "you from panic selling."To spread risk over a basket of stocks vs individual equities, investors can also seek the best dividend growth ETFs or low-volatility ETFs.
