The Israel-Iran Conflict in Historical Perspective
Let me start with a disclaimer: I’m not a geopolitical expert.
That’s a minefield best left to historians, diplomats, and late-night show hosts.
However, I do want to explore what the Israel and Iran tension might mean for the markets and how investors can think about risk if the situation escalates.
Hostilities Flare Up
Tensions recently grew between Israel and Iran, reviving a conflict that dates back to 1979 when the Shah of Iran was overthrown, and the new Islamic regime declared Israel an enemy1.
That hostility has simmered for decades, but it boiled over into the global spotlight last Friday.
Oil markets reacted quickly. A barrel of Brent crude briefly touched $75 before sliding back down.
Fun fact: There are 42 gallons in a barrel of oil.
Using the St. Louis Federal Reserve’s FRED service, Nicholas Colas of DataTrek Research shows that from 1987 to 2020, recessions all followed after a doubling of the oil price (grey bars are recessions):
According to the Cboe Crude Oil Volatility Index (which measures the market’s expectations of 30-day volatility in crude oil prices), oil volatility spiked to its highest level since 2022 (see chart below):
Meanwhile, the S&P 500 dropped 1% on the news:
The next concern was the Strait of Hormuz, a narrow waterway through which roughly 20% of the world’s oil supply flows.
If Iran were to block or even threaten to block the Strait, oil prices could spike quickly, dragging inflation concerns back into the headlines.
For now, however, cooler heads seem to be prevailing. On Monday, the market bounced back, rising about 1% (see chart below):
If the Israel-Iran tension spills over and draws in other nations or the oil supply is meaningfully disrupted, investor sentiment could change quickly.
Inflation expectations would rise, the U.S. central bank could keep rates higher for longer, and risk assets (e.g., stocks) could take a hit.
But if the conflict remains relatively contained, as markets currently expect, it may become another entry on the long list of scary headlines that didn’t stop the bull market.
Still, it’s something to watch in the weeks and months ahead.
How Markets Tend to React to Geopolitical Events
The stock market is often surprisingly resilient in the face of major geopolitical shocks.
Here’s a chart of how the S&P 500 has performed 1- year after a major geopolitical event happened:
The stock market has typically delivered positive returns one year after a global conflict, with an average gain of 14%.
Deutsche Bank’s Jim Reid notes:
Historically, the S&P 500 tends to fall about 6% in the three weeks following a major geopolitical shock but then fully recovers in the next three weeks.
It’s a pattern showing how fast sentiment can shift from fear to opportunity.
Two notable exceptions bucked this trend: the 9/11 attacks and Russia’s invasion of Ukraine.
After 9/11, the U.S. economy was already on shaky ground, with the dot-com bubble bursting. The attacks nudged us into a full-blown recession.
One year later, the S&P 500 was down nearly 17%.
Similarly, when Russia invaded Ukraine in 2022, it poured gasoline on the inflation fire.
Oil and food prices surged, central banks hiked rates aggressively, and bonds failed to provide their usual safety net.
Stocks tumbled, and the S&P 500 finished the year down 7.4%.
So, while most geopolitical events turn out to be temporary speed bumps for markets, some can have longer-lasting effects.
Final Thoughts
History shows that stocks can drop sharply in the face of global crises, but they tend to rebound, often sooner than people expect.
This isn’t to say geopolitical risk doesn’t matter. It does.
But it’s one risk among many, and markets tend to adapt quickly.
Endnotes:
1: Al Jazeera. Iran and Israel: From allies to archenemies, how did they get here? Maziar Motamedi. November 6, 2023.
Keep learning. Keep growing. Keep going.
Now here’s what I’ve been reading, listening, and watching:
Teddy Roosevelt and J.P. Morgan (the Titan vs the President) on Founders
Just Keep Buying by Nick Maggiulli
The Seven Frequencies of Communication by Erwin Raphael McManus
The 5 Types of Wealth by Sahil Bloom
Children’s book (I have a 5-year old): Benny Blue Takes on a Vacation by Meredith Tate
Here’s what I’ve been writing:
