Quite predictably, investors Tuesday did what they always do when a military conflict looks imminent — especially one involving the Middle East: They stepped back from the stock market while waiting to see what a possible U.S. military strike on Syria might do to geopolitical relationships and oil prices.
Investors with long memories know major upheaval in the Middle East can bring about oil shocks that weigh down Americans with high oil and gasoline prices. And in the worst of situations, the strains can spark recessions. It depends on how long conflicts last and whether major oil producers are involved.
Given the pressures American consumers have had to bear the past few years with job losses, stagnant pay and falling home values, this is not a time when skyrocketing gasoline prices would be tolerated well.
Yet, despite a 170 point drop in the Dow Jones industrial average Tuesday, many economists are not anticipating a tremendous surge in oil.
That's because Syria is not a major oil producer, and also because the U.S. produces more oil than it used to and is less dependent on Middle East oil than during oil shocks of the past four decades. But OPEC remains a major producer for the world, so instability in the Middle East and threats to its oil supplies do matter.
Amid the escalating tensions between Syria and the United States, said Ian Shepherdson, of Pantheon Macroeconomics, is the concern about fighting between Democrats and Republicans in Washington over the nation's debt ceiling.
"I'm very worried about a repeat of the summer of 2011," when the feud in Congress had an "enormous impact on business and consumer confidence," he said.
"Politicians can make people very nervous if they feel the government will default on (its) debts," he said.
Consumer confidence tends to be impacted by job stability and pay, home values, the stock market and costs of necessities like gasoline, and Capital Economics consultancy noted Tuesday that low gasoline prices lately have helped raise consumer confidence. Recently, gasoline was at $3.60 a gallon nationally, compared with $3.70 at the end of July.
In the near future, gasoline prices could start to work in the other direction — pulling confidence down rather than supporting it. In a report Tuesday, Barclays commodity analysts said geopolitical tension is likely to push oil prices higher over the next couple of months, but weak demand in the sluggish global economy and increased supply of oil from the U.S. and Canada will moderate prices.
WTI Crude oil climbed almost 3 percent Tuesday, to $109 a barrel. Recently, it has been trading between $103 and $108, and Bespoke Investment Group noted that after climbing above $108 Tuesday, it is likely to continue to rally.
If it hadn't been for turmoil in the Middle East, oil prices would have fallen, said Jim Burkhard, vice president of global oil research for IHS CERA, because China and many emerging market economies have slowed. Some are in recession.
He predicts oil prices will be flat for the year, yet notes: "The future of the Middle East is more uncertain than it's been for many years. Relationships that shaped Middle East policies for decades have been torn apart."
Investors aren't going to know the impact in a week or month, he said. "It's going to take many years. Turbulence and chaos are a part of generational change, and we do not know the new normal," Burkhard said.
As for the stock market, the threat of an attack could play with stock prices for awhile. But Doug Ramsey, chief investment officer of the Leuthold Group, suspects that investors will follow the typical response of selling stocks as they await an outcome in Syria, but then buy stocks shortly after violence erupts.
While responses to previous oil shocks have been dramatic at times, they were often short-lived. For example, after Iraq invaded Kuwait before the Gulf War of 1990, oil prices doubled and stock prices fell about 21 percent in three months. They quickly recovered after the United States went to war against Saddam Hussein.
Ramsey said the prices of all industrial commodities, including oil, are likely to remain low because Australia, Brazil and Canada added so much production capacity during China's boom years without realizing there would be an oversupply when China focused more on a consumer economy.
RW Baird Strategist Bruce Bittles said that although the stock market's response to the threat of war is usually short-lived, "the current situation is becoming more complicated with nuclear powers taking opposing sides."