Investors see quick stock market drop if US joins Israel-Iran conflict

FINANCIAL MARKETS may be in for a “knee-jerk” selloff if the US military attacks Iran, with economists warning that a dramatic rise in oil prices could damage a global economy already strained by President Donald J. Trump’s tariffs.

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Oil prices fell nearly 2% on Wednesday as investors weighed the chance of supply disruptions from the Israel-Iran conflict and potential direct US involvement. The price of crude remains up almost 9% since Israel launched attacks against Iran last Friday in a bid to cripple its ability to produce nuclear weapons.

With major US stock indexes trading near record highs despite uncertainty about Mr. Trump’s trade policy, some investors worry that equities may be particularly vulnerable to sources of additional global uncertainty.

Chuck Carlson, chief executive officer at Horizon Investment Services, said US stocks might initially sell off should Mr. Trump order the US military to become more heavily involved in the Israel-Iran conflict, but that a faster escalation might also bring the situation to an end sooner.

"I could see the initial knee-jerk would be, 'this is bad,” Mr. Carlson said. “I think it will bring things to a head quicker.”

Wednesday’s dip in crude, along with a modest 0.3% increase in the S&P 500, came after Mr. Trump declined to answer reporters’ questions about whether the US was planning to strike Iran but said Iran had proposed to come for talks at the White House. Adding to uncertainty, Iranian Supreme Leader Ayatollah Ali Khamenei rejected Mr. Trump’s demand for unconditional surrender.

US Treasury yields fell as concerns over the war in Iran boosted safe haven demand for the debt.