For the past two months, the Iran war has weighed on markets.
At the start, the reaction was exactly what you'd expect: fear spiked, shares fell and plenty of investors saw their portfolio trackers flashing red. Whether you looked at the S&P 500, The Dow, the ASX 300 or global equities more broadly, the pressure was hard to miss.
But recently ,we've started to see some rebound.
And that raised a question for me:
When geopolitical conflict breaks out, do markets really stay down for long?
Or do they recover much faster than most investors expect?
So today, I want to look back at how stock markets reponded to major geopolitical shocks in the past. The answer migt surprise you.
How did the markets respond to The World Wars?
During the two World Wars, the US stock markets generally performed better than many people would expect after the initial panic.
- In World War I (1914-1918), The Dow fell sharly (-30%) when markets reopened after the outbreak of war. But that weakness did not last. The index rebounded strongly, surged 88% in 1915 alone, and ended the broader war period up about 43%, or 8.7% annualised.
- In World War II (1939-1945), the S&P Composite, the precursor to today’s S&P 500, also showed strong resilience. After a weak 1941, it returned +20.34% in 1942, +25.90% in 1943, +19.75% in 1944, and +36.44% in 1945 on a total return basis, delivering roughly +119% cumulatively across 1941–1945.
How did markets respond to other conflicts?
The same pattern showed up in smaller conflicts too.
- When North Korea invaded South Korea in 1950, U.S. stocks did fall, but the damage was short-lived. The maximum drawdown after the event was about 12.9%, the bottom came 19 days later, the market recovered within 59 days.
- Even during the 1990 Gulf War, the one-year return was 13.66% after an initial drawdown of 16.9%.
This does not mean markets ignore global conflicts. They do react, and sometimes sharply. But history suggests they often recover faster than the headlines do. There are exceptions, of course, After the 9/11 attacks, the U.S. market was still down 13.75% a year later due to dot-com unwind and Enron scandal.
So this is not a rule that markets always bounce back instantly. It is, however, a remider that markets are forward-looking. Markets usually fall when uncertainty spikes and recover when investors start to see a path through it.
This is where the stock market and real life start to part ways.
Shares can recover as soon as investors think the worst-case scenario is becoming less likely. Your household budget does not work like that. It still has to deal with higher petrol prices, higher transport costs, more expensive freight, and eventually higher prices flowing through to groceries and other essentials.
In Australia, the fedral government is already warining there could be 'long tail' from the Iran conflict even if supply routes reopen.
So if the last two months have made your portfolio feel unsettling, I'm with you.
But history is a useful reminder that markets often recover faster than our emotions do, and much faster than eeryday costs do.
That's why I think it helps to separate the two: what the market is pricing, and what your household is still paying.
If this was useful, forward it to one friend who watches their portfolio too closely during scary headlines.
Talk soon,
Irene
P.S. You can access all the resources here.
