What History Says About War, Geopolitical Conflict, and the Stock Market
Over the weekend, the United States and allied forces attacked Iran. Conflict in the Middle East continues.
Unfortunately, unsettling headlines have become a regular part of the news cycle. In recent years alone we have seen Russia invade Ukraine, terrorist attacks, missile strikes, civil wars, and even regional conflicts such as with ICE.
These events raise an understandable question for investors:
What does geopolitical conflict mean for markets?
Markets React Quickly to Uncertainty
Markets do not like uncertainty. When conflict emerges, volatility often follows.
When Russia invaded Ukraine in February 2022, the S&P 500 closed that day at 4,288. Three months later it had declined to roughly 3,941, a drop of about 8 percent. The reaction was meaningful because the conflict affected global energy markets, supply chains, and inflation.
Other conflicts produced very different results. When Hamas attacked Israel on October 7, 2023, the S&P 500 rose nearly 10 percent over the following three months. Markets also moved higher after the Sudan civil war began in April 2023, after the Taliban took control of Kabul in August 2021, and even after the 2020 war between Armenia and Azerbaijan.
The takeaway is that markets respond to uncertainty, but the reaction is often temporary.
What History Shows
Looking across decades of history provides useful perspective.
According to research from LPL examining geopolitical shocks since World War II, the S&P 500 has experienced an average decline of roughly 5 percent following these events. Markets have typically bottomed within about three weeks and recovered within one to two months.
Examples include:
- During the Cuban Missile Crisis in October 1962, the S&P 500 fell about 7 percent before recovering the losses in just over two weeks once tensions eased.
- After the attacks of September 11, 2001, the market dropped roughly 11 percent during the first week of trading but recovered within about a month.
- Even during the Gulf War in 1990, which coincided with a recession, markets rebounded once uncertainty began to fade.
Another interesting pattern emerges when we look further out. Research from Hartford Funds shows the S&P 500 has been higher one year after the onset of armed conflict roughly 70 percent of the time.
Why Markets Often Move On
Markets ultimately respond to economic growth, corporate earnings, interest rates, and innovation.
Geopolitical events may affect these forces in the short term, but they rarely change the long term trajectory of economic progress.
That does not mean conflicts are irrelevant. The oil embargo of the 1970s and the energy shock following Russia’s invasion of Ukraine both had real economic consequences. But in both cases, the market reaction was tied more to economic ripple effects than to the conflict itself.
Markets are not reacting to the presence of conflict.
They are reacting to how that conflict might affect the economy.
The Investor Takeaway
Every generation feels like it is living through unusually uncertain times. Yet history shows that uncertainty has always been present: world wars, cold wars, regional conflicts, and political crises.
Through it all, markets have continued to grow alongside the global economy.
Short term volatility around geopolitical events is normal. But making long term investment decisions based on headlines has rarely been a successful strategy.
In the moment these events feel unprecedented.
In history, they rarely are.
