How Markets Historically Respond to Geopolitical Conflict

Imagine you are on a long cross-country flight. Somewhere over the Rockies, the plane suddenly hits turbulence. The cabin shakes, drinks slosh, and a few passengers grip their armrests. For a moment, it feels dramatic. But the pilots rarely change course. The aircraft keeps moving toward its destination because the turbulence is simply part of flying. Markets behave much the same way when geopolitical conflict erupts. The headlines may feel intense, prices may move quickly, but a single geopolitical event rarely determines the long-term trajectory of global markets. 

Why Iran Matters to Global Energy Markets

The possibility of an expanded conflict involving Iran has understandably captured investors’ attention. Iran sits at the center of a region that plays an outsized role in global energy supply. Roughly one-fifth of the world’s oil moves through the Strait of Hormuz, the narrow shipping channel between Iran and the Arabian Peninsula. Even the possibility of disruptions in that corridor can push oil prices higher as traders factor in the risk of supply interruptions. 

How Energy Shocks Can Affect the Economy

When oil prices rise quickly, the effects ripple through the global economy. Transportation becomes more expensive. Manufacturers face higher input costs. Consumers feel the pressure at the pump. These dynamics can also complicate the job of central banks, which must balance economic growth with inflation concerns. For investors, that combination often translates into periods of market volatility. 

What History Shows About Markets and Geopolitical Crises 

However, this is where historical context becomes helpful. Markets have experienced geopolitical shocks many times before, particularly involving energy and the Middle East. The 1973 oil embargo is often cited as the most severe example. Oil prices quadrupled almost overnight, triggering inflation and recession in many developed economies. It was a genuine economic shock. 

Yet even that crisis did not permanently derail global markets. Economies adapted. New energy sources were developed. Supply chains adjusted. Over time, markets recovered and continued their long-term upward path. 

More recent examples follow a similar pattern. When Iraq invaded Kuwait in 1990, oil prices surged dramatically, and markets initially sold off. The S&P 500 dropped about 16 percent during the early stages of the crisis. But by the end of the following year, the market had recovered those losses and moved higher as the conflict concluded and economic activity stabilized. 

The same pattern appeared during the Iraq War in 2003 and during the Arab Spring in 2011. Markets experienced short bursts of volatility as uncertainty rose, but those events ultimately proved to be temporary disruptions rather than long-term economic turning points. 

Why Markets Often React to Uncertainty First

This pattern highlights an important truth about markets. Prices tend to react to uncertainty more than to the actual economic damage. When investors do not know what might happen next, they demand a risk premium. Once the range of possible outcomes becomes clearer, markets typically stabilize. 

What Investors Should Watch if Conflict Escalates

In the case of a potential conflict involving Iran, the biggest variable remains energy. If shipping through the Strait of Hormuz were disrupted for an extended period, oil prices could rise meaningfully. Higher energy prices could push inflation higher and slow economic growth. Certain sectors, such as transportation and manufacturing, might feel the pressure, while energy producers could benefit. 

But even in those scenarios, markets tend to adjust over time. Higher prices encourage additional production from other regions. Strategic reserves can be released. Demand often adjusts as consumers and businesses respond to rising costs. These mechanisms have repeatedly helped stabilize energy markets following geopolitical shocks. 

Staying Focused on Long-Term Investment Discipline

For long-term investors, the lesson is not to ignore geopolitical risk. Rather, it is that reacting emotionally to every headline has historically proven to be a poor strategy. Markets have endured wars, financial crises, political upheavals, and global pandemics. Yet, the long-term drivers of investment returns remain largely unchanged: economic growth, innovation, productivity, and corporate earnings. 

Markets Have Navigated Conflicts Throughout History

Growth of $1 in the U.S. Stocks Since 1926

Sources: Data from July 1926 – December 2025. Ken French Data Library, Avantis Investors.

Periods of geopolitical tension can create short-term volatility. In fact, it would not be surprising to see markets move sharply in response to developments involving Iran. But volatility alone does not necessarily translate into lasting damage for diversified investors. 

Returning to our analogy, turbulence during a flight can feel uncomfortable in the moment. But experienced travelers know that it is usually temporary. The plane continues forward, the air eventually smooths out, and the journey proceeds as planned. In investing, it helps to remember that you are not flying the plane alone. You have professional pilots monitoring the instruments, adjusting the route when necessary, and keeping the aircraft steady through the bumps. Periods like this are a reminder that discipline and guidance matter. When the air gets rough, the best course is often the same one seasoned travelers take: stay seated, keep your perspective, and trust the pilots to guide the plane safely to its destination.