Like a dormant volcano, the war in the Middle East between the United States, Israel and Iran has erupted with tragic vengeance this week. And the ASX stock market has certainly taken notice.
As it currently stands, the US and Iran have been trading strikes, and the Strait of Hormuz is once again completely closed, if it wasn't already for all intents and purposes. Oil hasn't been flowing through the Strait for months now, at least at anywhere near the volumes that it was in February. But now that this vital spigot of the world's economy looks less likely than ever to stage its grand reopening, it seems prudent to discuss the implications for the ASX stock market and Australian investors.
So, could another oil stock tank the ASX stock market?
Image source: Getty Images
Oil and the ASX stock market
Well, that's the $64 trillion question. The short answer is yes. As you can imagine, there is arguably no economic input more important to any economy than oil. It is what enables the arteries of commerce to flow, powering everything from logistics to manufacturing.
If oil rises in price, it becomes more expensive for Woolworths Group Ltd (ASX: WOW) to ship food and household essentials from supplier to warehouse to store, for Telstra Group Ltd (ASX: TLS) to dispatch installation and repair teams to internet connections, and for BHP Group Ltd (ASX: BHP) to drive its mining trucks and equipment. And that's just a few of millions of examples.
There's also the inflationary impacts to consider, which probably don't need much elaboration.
There would be few winners and many losers if a severe oil shock hits the global economy. We got a taste of it a few months ago, and if the Strait does not reopen, things could get even more severe.
That all sounds rather bleak, and I apologise for it. However, I always try and let the maxim of 'hope for the best, prepare for the worst' guide my investing decisions.
So what should investors do? Well, I think that nothing is the safest path. Hear me out.
This too shall pass
We invest in the ASX stock market and buy shares and index funds to build long-term wealth. Hopefully, we only buy shares of the best companies Australia can offer, companies that sell goods and services that we either need, or desire so passionately that we feel we need.
If that is the case, then these companies will adapt to adverse conditions, survive, and then eventually thrive once more. That's what happened in the global financial crisis, and the COVID pandemic, and what will happen again if there is indeed another oil shock.
Selling these shares on the chance of what will be a painful, but ultimately temporary, oil shock, is folly, and likely to backfire.
If an investor just sticks to buying index funds, they should arguably hold the fort too. As our Chief Investment Officer, Scott Phillips, points out every year, the Australian share market has historically endured everything that the world has thrown at it, including the catastrophic events above, and come out the other side to hit new record highs. I think there's no reason to believe that won't happen again in the event of another oil shock.
Whenever a frightening event like an oil shock hits the economy, it can be difficult to remain clear-eyed and level-headed. However, I think that if investors keep in mind that the markets have always historically recovered from everything the world has put on their path, they can get through whatever happens in the Strait of Hormuz in the coming weeks and months.
