Markets and military conflicts: What the data shows

The conflict between the US, Israel, and Iran has intensified over the past week. Oil prices surged past US$100 per barrel before easing, and stock markets have been equally volatile. If you're feeling uneasy, this is when the data deserves your attention more than the headlines.

The case for staying invested

The stock market has a long track record of weathering geopolitical shocks. The Royal Bank of Canada studied 20 major military conflicts since the Second World War and found that the S&P 500 fell about 6% on average from peak to trough, taking only 28 trading days to recover. 

LPL Financial looked at a broader set of 40 major geopolitical events over the past 85 years and found a similar pattern, with stocks typically recovering within six weeks.

Look further out and the case strengthens. Research from Birinyi Associates found that the S&P 500 gained an average of 12.5% in the twelve months following the start of US military conflicts, compared to the long-run average of 9%. In other words, selling into geopolitical volatility has historically meant missing above-average returns.

What about oil?

A prolonged disruption of the Strait of Hormuz, through which 20% of global oil flows, would push energy prices higher and weigh on growth. There are, however, important points to note.

The worst oil-related market outcome on record is the 1973 Arab oil embargo, which kicked off a lengthy recession and an inflation surge that took years to bring under control. That crisis was compounded by a US economy heavily dependent on oil imports, alongside a series of fiscal and monetary policy missteps at the time.

The conditions today are different. The US is now a net exporter of oil and natural gas, which makes its economy less vulnerable to energy price shocks. This conflict also comes at a moment when global oil markets had been oversupplied, with prices trending down over the past two years. On top of that, OPEC+ had agreed at the start of the conflict to increase production by 206,000 barrels per day starting in April.

A sustained disruption to energy supply would still weigh on growth, and the situation remains fluid. While no one can predict how it will play out, the global economy entered this conflict on stronger footing than the oil shocks of the past.

What this means for you

Volatility can be worrying, but reacting to it tends to cost more than simply staying the course. The pattern across decades of geopolitical shocks is consistent: markets dip on uncertainty, then recover as conditions stabilise. Panic selling works against that pattern and may lock in losses before a recovery.

Moving to cash might feel safe, but it also carries its own risks. Cash loses value to inflation over time, and investors who exit the market during volatility risk buying back in at higher prices. The cost of being on the sidelines, even briefly, tends to be greater than the discomfort of staying invested through the turbulence.

If you're looking to add resilience to your portfolio, consider assets that tend to hold up during periods of market stress. Gold has historically served as a safe haven, while defensive sectors like consumer staples and utilities offer stability. These asset classes are available through Flexible Portfolios.

Investing regularly in periods like these can work in your favour, smoothing out your average entry price over time. More importantly, it takes the emotion out of the equation and keeps your money working for you regardless of the market’s ups and downs.