War is, first and foremost, a human tragedy. The headlines out of Iran this week are heavy, especially for anyone with loved ones in the region, military connections, or simply a deep empathy for people caught in the middle.
Amidst the unsettling headlines, a few clients have reached out to ask: What does this mean for my portfolio? U.S. stocks have declined slightly this week, remaining in a ‘wait and see’ mode for the moment, while European stock markets have seen larger declines. However, history shows us that most geopolitical conflicts have not led to long-term declines in financial markets. This is not to minimize the tragedy of war; it simply reflects how markets function. They respond to profitability and growth, and most modern conflicts have not broadly disrupted corporate earnings power.
Lessons from Market History
History can’t predict outcomes with certainty, but it can help us recognize patterns. When geopolitical conflict erupts, the first move is reactionary. Equity prices decline on the initial news, with some rotation into safe havens such as gold or US treasuries. This was on display when markets opened on Monday morning. The next move is usually analytical, with investors assessing which ripple effects truly matter. This took shape throughout the week, with oil prices rising 20%+ in response to the current conflict. [1] Eventually, though, markets determine that the risk has been adequately priced or the conflict de-escalates, and investors return their attention to a broader set of market factors.
While every conflict has unique impacts on the market, patterns can add a helpful perspective. Looking at twenty different geopolitical shocks since 1940, history shows that the S&P 500’s average decline has typically been in the mid-single digits, with the downturn typically lasting a few weeks and then recovering over the following few months.[2] Here are a few examples:
- During the Cuban Missile Crisis in October 1962, as the United States and the Soviet Union approached the brink of nuclear conflict, the S&P 500 fell about -7% in the first several trading days. Once the crisis de-escalated, markets recovered those losses within a few weeks.
- The Gulf War in 1990-1991, which coincided with a recession, saw the S&P decline by -17% and oil prices double in the immediate aftermath, but stocks recovered within six months once uncertainty began to fade.
- Most recently, Russia’s invasion of Ukraine in 2022 rattled global markets. The S&P 500 fell more than -7% following the initial incursion as investors worried about the impact on commodity prices. However, a month later, markets had rebounded, and the S&P was trading higher, even as the price of oil remained elevated above $100 a barrel.[3]
There are no guarantees that the current conflict will follow this pattern, and it’s important to acknowledge that some events are larger, longer, and more economically disruptive than others. Conflicts feel destabilizing in the moment and can cause real market volatility. However, historically speaking, geopolitical shocks have not derailed long-term growth for diversified investors.
War is Regional, Energy Inflation is Global
In the current Iran conflict, the immediate market implication is clear: higher energy prices. Iran and neighboring countries in the Middle East are key global suppliers of oil and natural gas, and any disruptions can rapidly impact prices for consumers and businesses.
At present, U.S. diesel prices have already moved above $4 per gallon in response, which drives up manufacturing and transportation costs. Europe, which has limited domestic production options, may see sharper impacts from the unfolding energy crisis. If higher energy prices are sustained over the coming months, global inflation numbers will begin to reflect these higher costs.
Even if de-escalation or a ceasefire can be achieved, energy markets could retain a risk premium for a while. When the administration eventually declares the war has been won, it won’t necessarily mean risk has been removed. Shipping route insurance, infrastructure vulnerability, and regional tensions will likely remain elevated, keeping prices above prior levels.
The Strait of Hormuz
If there is one geographic focal point this week, it’s the Strait of Hormuz. This narrow shipping corridor functions as a major gateway for global energy flows.
The U.S. Energy Information Administration estimates that in 2024, oil flow through the Strait of Hormuz averaged about 20 million barrels per day, roughly 20% of global petroleum export consumption. That same agency also highlights the Strait’s importance to natural gas markets: in 2024, about 20% of global liquid natural gas (LNG) trade also passed through the strait, primarily from Qatar. This is why markets are watching shipping traffic and safe passage signals so closely as the current conflict unfolds.
If the strait remains closed for an extended period of time, we expect oil prices to rise further in the short term. To the extent that shipping traffic resumes, and as the U.S. offers insurance and protection, the market impact may be softened even if the broader conflict persists.[4] In the short-term, day-to-day market reactions will continue to be “headline-driven” as new information shifts investor expectations.
Maintaining Perspective
The coming days may continue to deliver difficult headlines, changing narratives, and short-term market swings. In environments like this, it can be tempting to feel that we need to react quickly.
For our clients and most long-term investors, however, the most valuable actions in moments like this are often the least dramatic: staying diversified, rebalancing strategically, and aligning risk and liquidity with personal financial plans rather than trying to time the market. Discipline is a more reliable strategy than prediction, and markets have consistently rewarded those who maintain perspective through periods of uncomfortable uncertainty.
Resources
[1] Oil price chart. Bloomberg
[2] Middle East Conflict: How Stocks React to Geopolitical Shocks. LPL
[3] Impact of War on Stock Markets: Investor Insights and Trends. Investopedia
[4] War in Iran: Frequently Asked Questions. Schwab Research
