The Strait of Hormuz Is Closed, and Why That's a Huge Problem for the Price of Oil and the S&P 500

The war in Iran is a major concern for the markets in 2026, one that can have a significant impact on how the S&P 500 (SNPINDEX: ^GSPC) performs. As of Friday, the broad index, which encompasses the 500 leading companies in the world, was down around 3% since the start of the year. That's notable when you consider that in each of the past three years, its annual return has been more than 16% -- well above its long-run average of just 10%.

But the conflict is ongoing, and things could get worse. A new issue that has arisen that could weigh heavily on oil prices and the market's performance is the closing of the Strait of Hormuz. Here's why that can be a crucial development to monitor, and what it might mean for the stock market this year.

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Why the closure of the Strait of Hormuz could have a big impact on the markets in 2026

As a way to put pressure on the U.S. in the ongoing conflict, Iran has blocked the Strait of Hormuz, which is a key shipping route in the Middle East. It connects the Persian Gulf to the Arabian Sea, and ultimately, to the Indian Ocean. An estimated 20% of the world's oil supply goes through here. Hence, you may not be surprised to see that oil prices have been surging to levels not seen since 2022. The price of oil has been volatile, but right now it's around $100 per barrel.

Back in 2022, not only were oil prices high, but so too was inflation, which at one point reached more than 9% -- an almost unheard-of level that consumers haven't seen for decades. That year, the S&P 500 also crashed by 19%.

This doesn't mean that 2026 will be a repeat of 2022, but it may still be a bad year overall for the markets. Elevated oil prices can impact shipping costs, which then, in turn, affect how much consumers pay for products. As inflation rises, the possibility of rate cuts declines, and that could make investors more bearish on stocks. It's a massive ripple effect that can stem from what happens in the Strait of Hormuz. The longer the issue goes on, the more drastic and prolonged the effect on the markets is likely to be.

What should investors do amid this uncertainty?

Although the situation in the Middle East may seem unnerving, it can also change drastically and at a moment's notice. It can be a risky strategy for investors to invest based on government or economic policy. Remember, Warren Buffett remained invested even amid wars. The first stock he bought was during World War II. He remained invested for decades and benefited from staying the course.

And that's what investors today should consider doing as well. As long as you have a long investing time frame and don't need to access your money soon, remaining invested in S&P 500 index funds can still be a good move. While there may be some volatility this year due to the conflict in the Middle East, it's not necessarily a reason to get out of the stock market.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.