Trump needs to keep his popularity among Americans at a high level, at least till November this year when he has a good chance to be reelected as president. The trade war is, just for a couple of months, a bit to the background. Trump has been looking for a next topic to gain popularity on and has found it: revenge for American victims in the Middle East.
Top Iranian general killed
In the night of Thursday to Friday, the US killed a top Iranian general, Soleimani, in a Baghdad air strike. According to Trump, Soleimani is directly and indirectly responsible for millions of deaths and killing an American on the 27th of December. Soleimani was a powerful man within the Iranian regime. Killing him is a strong symbolic statement to Iran and the world: the US is taking the Midde East situation very seriously and does not hesitate to escalate the situation if needed.
The oil price moved up over 3% on Friday on the increased tensions in the Middle East. With the US shale boom, the Middle East is getting less and less powerful within the oil landscape. But still, the Middle-East produces around 35-40% of the total oil production. The oil price will increase much further in case a war with Iran will be started. Iran itself does not produce much oil anymore due to sanctions, but Saudi-Arabia and Iraq do. An increase in oil price is not per se bad for the US. The US is the top oil producer world wide and will probably increase production much more when Crude Oil peaks above $70.
Trump threatens Iran
Trump threatened Iran with targeting 52 Iranian sites in case Iran hits any Americans or American assets. Iran took 52 American hostages many years ago and the 52 targets have in that way a symbolic meaning. Trump says to hit Iran very hard in case Iran further escalates the tensions. This way of speaking we know from Trump and often not much happens. Maybe it is different this time, who knows. Iran is expected to somehow retaliate at some point. They will not hit the USA directly but probably indirectly by attacks in Iraq, Israel or Saudi Arabia. They might finance terrorist groups with extra weapons or money to target US assets.
What would extra attacks mean for the stock market?
Stocks normally initially get into negative territory when people fear a war and when the war starts. Though, during the wars, stock markets have performed well. A significant dip of over 10% on some kind of Middle-East war, could most likely be seen as a buying point. In the last gulf war, the S&P initially lost over 14% and recovered very strongly after. If the US and Iran get into a full-blown war, which is still unlikely, there is no need to worry about the stock market. Initiatlly there will be a shock, but over the span of 1-3 years there is no reason to expect an underperformance. In the past, the S&P has even outperformed in periods of war! Even during World War II, the S&P posted gains!