History Repeating? The 1980s "Tanker War" May Be the Best Market Reference for Current Iran Situation

The Iran-U.S. conflict has lasted nearly two weeks, and market patience is wearing thin. Oil prices have returned to triple digits, and U.S. stocks are under pressure. Historically, a little-known conflict may offer the most relevant market reference for the current situation.

Barclays’ strategy team notes that the market still expects the conflict to end in the short term, and sentiment remains relatively stable. However, they warn that if the Hormuz Strait blockade persists and oil prices stabilize above $100 per barrel, market confidence in the “Trump administration using policy measures to support the stock market” will be tested.

Against this backdrop, Citi’s global macro strategy team reviewed the last five oil crises and believes that the “Oil Tanker War” during the Iran-Iraq War in the 1980s is more relevant to current reality than the crises of the 1970s, providing more practical guidance for investors’ asset allocation.

Why the 1970s Analogy Fails

In response to Middle Eastern oil crises, the market’s instinct is to look back at the 1973 Yom Kippur War and the 1979 Iranian Revolution—two oil shocks that caused severe global economic turmoil. However, Citi’s global macro strategy team argues this analogy does not hold.

The main reason lies in differences in market structure at the time. Strategists point out that in the 1970s, oil prices were kept artificially fixed, with price controls suppressing volatility. “Pegged exchange rates usually dampen fluctuations; once the peg breaks, suppressed volatility is released in a concentrated manner, causing far greater disruption than natural adjustments in flexible markets.”

Additionally, two key differences make the current situation less comparable to the 1970s: the U.S. is now a net oil exporter, and the global economy’s dependence on oil has significantly decreased. These factors greatly reduce the relevance of the 1970s analogy.

“Oil Tanker War”: A Closer Historical Mirror

Strategists turn their attention to the Iran-Iraq War in the 1980s. During that time, Iran and Iraq attacked each other’s and third-party oil tankers in the Persian Gulf, causing a temporary 20% drop in tanker traffic through the Strait of Hormuz, eventually prompting U.S. naval escort operations.

From price trends, this history aligns more closely with the current situation. Oil prices peaked in July 1987 after a U.S. vessel hit a mine, but the S&P 500 maintained an upward trend throughout this period, despite experiencing the “Black Monday” crash in October of the same year.

This suggests that even amid an oil crisis and market collapse, equities demonstrated resilience. Citi strategists believe this historical pattern bears similarities to the current market landscape and warrants close attention.

Overweight Tech Stocks in U.S. Equities, but Wait for Volatility to Subside

In light of escalating geopolitical risks, global investors’ holdings have shifted noticeably. Comparing asset allocations before and after the conflict’s outbreak, Citi strategists found the most significant adjustments are:

Investors sharply reduced overweight positions in the Korea Composite Stock Price Index (KOSPI) and the UK FTSE 100; meanwhile, their underweight in the Nasdaq has narrowed, and their underweight in Russell 2000 small caps has deepened.

Strategists believe this is a systematic retreat from the “sector rotation” seen in previous quarters. Defensive capital is concentrating in large-cap tech stocks, while moving away from small caps that are more sensitive to economic cycles. In terms of asset allocation, Citi maintains an overweight stance on U.S. stocks but has downgraded U.S. small caps from overweight to neutral.

Citi strategists also highlight that the International Energy Agency (IEA)-led coordinated release of strategic reserves has failed to significantly push down oil prices, which is a warning sign. “We need to wait for volatility to decline before adding further positions,” they say.

Retail Investor Sentiment: Softening but Not Crashing

Barclays’ strategists also track retail investor sentiment. Data shows that retail investors’ confidence has cooled but remains far from the extreme pessimism typically associated with major market sell-offs.

Barclays states that recent conversations with clients confirm this assessment—most investors are adopting a wait-and-see approach, some are buying dips for hedging, but there is no clear mass exodus.

This aligns with the overall market expectation that the conflict will be short-lived. However, strategists warn that this resilience has conditional limits: once the Hormuz Strait situation evolves into a prolonged standoff, market confidence in the “Trump ending the conflict to stabilize stocks” narrative could rapidly fade.

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