Key Points

Military actions have increased nervousness in equity markets.
Possible tariffs may introduce further uncertainty.
Elevated volatility offers chances for patient investors.

The Iran conflict escalated again in July after a short pause in fighting. As a result stock and oil markets have experienced notable fluctuations.

For example the S&P 500 index declined 0.8 percent in a single day in mid-July after President Donald Trump's statement that the United States would reinstate a blockade preventing Iranian vessels from passing through the Strait of Hormuz.

Given the administration's frequent changes in positions and policies forecasting geopolitical and economic developments remains challenging. Nevertheless short-term fluctuations should not worry investors focused on the long term.

Donald Trump President of the United States. Image source: The White House.

Markets with Potential Volatility

Equity volatility might increase significantly. The CBOE Volatility Index which tracks the S&P 500 volatility and is known as the fear gauge stood at 18.7 compared to an average of 17.91 in June. In the early stages of the conflict in March it averaged 25.6.

In addition to the uncertain military situation Trump has revealed intentions to impose tariffs. The White House stated that the president plans to add a 50 percent tariff on specific Canadian products.

Moreover the administration has explored methods for wide-ranging tariffs. After the Supreme Court invalidated earlier efforts Trump enacted temporary 10 percent tariffs and subsequently new rates of 10 to 25 percent on 60 trading partners when the temporary steps ended on Friday.

This mix could generate economic uncertainty and thus increase volatility. Yet this may not be negative for long-term stock investors.

Long-Term Strategy

Volatility tends to even out over extended periods. With sufficient resources it might also allow purchasing stocks at more attractive prices.

For example an investment in the S&P 500 at the beginning of 2007 prior to the Great Recession held until now would have yielded a 659 percent return including dividends. More recently investing at the start of 2020 before awareness of the COVID-19 pandemic would have produced 153 percent returns without additional contributions.

These are exceptional times complicating short-term market predictions which is difficult even in stable periods. Investors without a long-term perspective should consider safer options like short-term fixed-income exchange-traded funds.

However with an extended time horizon geopolitical incidents and economic policies should not trigger panic but rather represent a chance to profit.

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The opinions expressed here are those of the author and may not represent those of Nasdaq Inc.