BREAKING! Conflict in the Strait of Hormuz Escalates, Retail Investors Suddenly "Stop" and No Longer Buy the Dip

(Source: Business Observer)

In mid-March, the Middle East situation completely exploded. Smoke filled the skies over the Strait of Hormuz, the U.S. launched a heavy ammunition strike on Iran’s missile positions, and key Iranian officials were assassinated, causing the once-busy “energy throat” to come to a halt. Meanwhile, across the Atlantic in the U.S., the capital markets also stirred—over the past year, retail investors in the U.S., who have been consistently buying the dip regardless of market declines, suddenly hit the brakes and stopped bottom-fishing. On one side, the Middle East conflict escalated; on the other, retail investor enthusiasm plummeted by 30%. What is the connection between these two?

1. Sudden Developments: Hormuz Strait Hit Again, Iranian Officials Assassinated

Early morning on March 18, Tehran time, a shocking news broke worldwide: Ali Larijani, Secretary of Iran’s Supreme National Security Council, was killed in an airstrike. According to Iran’s official statement, he was not alone—his son Murtaza Larijani and several security personnel also died. The airstrike was carried out by the Israeli military.

Those familiar with Middle East affairs know Larijani is no ordinary figure—he was a close associate of Iran’s late Supreme Leader Khamenei. After Khamenei’s death in late February during a joint U.S.-Israel airstrike, Larijani became the de facto leader of Iran, leading retaliatory actions against the U.S. and Israel. His assassination is another heavy blow to Iran, which has explicitly stated it will strengthen its “resistance” stance.

On the same day, the U.S. military was not idle. U.S. Central Command announced the use of multiple 5,000-pound deep-penetration missiles to precisely destroy Iran’s fortified missile launch sites along the Strait of Hormuz. The U.S. justified this by claiming these missiles threatened international shipping in the strait. However, perceptive observers see this as a joint effort by the U.S. and Israel to further squeeze Iran’s survival space.

It’s important to note that the Strait of Hormuz is a global “energy artery,” with nearly 20% of the world’s oil passing through it. Since the U.S.-Israel large-scale military operations against Iran on February 28, Iran has declared a blockade of the strait, and shipping there has almost completely halted. According to Lloyd’s Shipping Information, only 77 ships passed through in March, compared to 1,229 in the same period last year—a stark difference.

Faced with this situation, different parties have taken distinct stances. Iran’s new Supreme Leader, Khamenei, has vowed to continue the blockade of the Strait of Hormuz; Iran’s Parliament Speaker, Kalibaf, stated that the strait will never return to pre-war conditions. On the U.S. side, Trump complained that NATO allies are not cooperating with escort missions in the strait, expressing disappointment in NATO, while also claiming that the strait will soon be safe for navigation. He added that the U.S. is not ending the conflict immediately but will leave soon.

More notably, the Pentagon has begun deploying additional troops to the Middle East. The U.S. amphibious assault ship “LHD” heading from Japan is en route, indicating that the conflict may escalate further. The EU has made it clear that “this is not Europe’s war” and refuses to involve itself further, rejecting the expansion of escort operations to the Strait of Hormuz. Trump’s attempt to rally allies for a “united front” has failed.

2. Unusual Signal: U.S. Retail Investors Suddenly “Hold Back,” Bottom-Fishing Enthusiasm Drops 30%

The Middle East conflict has not only disrupted global energy markets but also directly impacted U.S. capital markets, most notably retail investors’ attitudes.

Those familiar with the U.S. stock market know that over the past year, retail investors have been the “contrarians”—buying aggressively during declines, with “buy the dip” becoming their hallmark. In February, they even ignored seasonal patterns, achieving the third-largest monthly purchase volume on record, impressing institutional investors with their courage.

But recently, this momentum has been broken. A report from JPMorgan in mid-March shows that from March 5 to 11, retail investors’ weekly buying volume plummeted nearly 30% week-over-week, and ETF weekly net inflows decreased by 22%, ending a three-month streak of continuous buying. This is the first time this year that retail investors have shown sustained fatigue—they are no longer the daring “bottom-fishing army” they once were.

Specifically, retail fund inflows dropped to $6.7 billion, below the past 12 months’ weekly average of $7.1 billion. While ETFs still attracted $6.3 billion, individual stock purchases shrank sharply to just $400 million. Notably, last Monday saw a dramatic sell-off on Wall Street—the largest single-day net sellout of individual stocks in a month. Although buying recovered over the next two days, it remained well below the year-to-date average.

Some may ask: are retail investors simply holding back, or shifting their investment focus? The answer is the latter. JPMorgan’s report indicates that while overall retail positions have shrunk, their stock selection has become more targeted: they are heavily increasing positions in large tech stocks like Nvidia, Broadcom, Oracle, and Microsoft—Nvidia alone was bought for $399 million in one week—while significantly reducing holdings in energy, financials, and healthcare sectors. Funds are flowing out of energy-focused funds and into funds tracking crude oil prices.

Additionally, retail investors are quietly positioning in defensive stocks, such as aerospace and airline-related shares, seemingly preparing for ongoing uncertainty. Even Nomura strategists have observed that options traders related to big tech and the Nasdaq 100 are preparing for “disaster,” with cautious sentiment spreading across the market.

3. Underlying Logic: The War Isn’t Over, Retail Investors Are Afraid to Bet

Some may wonder: why, despite severe declines in the past, did retail investors suddenly become cautious? The core reason is that the uncertainty in the Middle East has exceeded their risk tolerance.

First, the continued blockade of the Strait of Hormuz has driven up global oil prices, which surged to nearly $120 per barrel last weekend—an increase of 69.2% this year. Rising oil prices directly add inflationary pressure in the U.S., which could delay or even reverse Federal Reserve rate cuts. This is clearly negative for stocks. While retail investors are willing to buy the dip, they are also wary of inflation’s chain reactions—no one wants to risk their hard-earned money on an unpredictable future.

Second, the U.S.-Iran conflict shows no signs of ending and appears to be escalating. U.S. troop deployments in the Middle East continue, Iran remains firm, and Israel keeps launching airstrikes. No one knows when the next sudden event will occur. JPMorgan notes that retail behavior now resembles early 2022 during the Russia-Ukraine conflict—initially buying energy stocks, then shrinking positions as uncertainty grew, becoming more cautious.

Another key factor is the U.S. economy’s own vulnerabilities. Bank of America analysts warn that the recent oil price surge combined with shadow banking credit risks resemble the pre-2008 financial crisis pattern, which has shaken retail confidence. The memory of the 2008 crisis, which wiped out many retail investors’ savings, remains vivid, and few want to repeat that mistake.

It’s important to recognize that retail investors have become one of the most influential participants in the stock market—especially during the pandemic in 2020, when many were stuck at home and flooded into stocks, forming a habit of “buy the dip.” But this time, they are choosing to hold back—not because they are bearish on the market, but because they are afraid to gamble on the situation improving. Under the shadow of war, there are no guarantees of safety; better to wait and see.

4. Future Impact: How Long Will Energy and Stock Market Volatility Last?

Currently, the Middle East situation is unlikely to ease in the short term, and the blockade of the Strait of Hormuz may continue, with ongoing impacts on global energy markets and U.S. stocks.

For energy markets, the disruption of shipping through Hormuz will likely widen the global oil supply gap. The International Energy Agency has warned that the world’s oil market faces its most severe supply bottleneck ever. If this persists, oil prices could continue rising, affecting economic recovery worldwide.

For U.S. stocks, retail caution is expected to persist, making it difficult to return to the previous “buy the dip” enthusiasm in the short term. However, large tech stocks remain popular among retail investors, helping the major indices stay resilient amid volatility—on March 17, the Dow rose slightly by 0.10%, the Nasdaq by 0.47%, and the S&P 500 by 0.25%. Although modest, these gains reflect market differentiation.

For retail investors, their “pause” is a rational choice. After all, risk aversion is the core of investing. In uncertain times, shrinking positions and cautious waiting are better than blindly buying and risking losses. JPMorgan predicts this cautious sentiment may last until there are clear signs of easing in the Middle East.

In conclusion, the conflict over the Strait of Hormuz is never just a Middle Eastern issue; it affects global energy and financial markets at every nerve. The sudden withdrawal of retail investors is a normal market response to uncertainty. How the situation develops, and how oil and stocks will fluctuate, remains to be seen—after all, in the face of war, any prediction is fragile. Peace remains the most desired outcome for everyone.

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