What history says about markets and geopolitical crises

The news coming out of the Middle East over the past several days has been difficult to watch.

Airstrikes.

Retaliation.

Rising tensions across the region.

Behind the headlines, there are real people and families caught in the middle of events far beyond their control.

At the same time, conflicts can spread through the global economy. Traders are already seeing that reaction in markets.

Oil prices have surged.¹

Stocks have plunged.²

And the financial headlines have started to get a lot louder.

When events move this quickly, it’s natural to wonder what it could mean for the economy and for your investments.

But before jumping to conclusions, it helps to zoom out and look at the bigger picture.

Right now, much of the market reaction comes down to energy.

A sizeable share of the world’s oil moves through the Middle East, including a narrow shipping route called the Strait of Hormuz. About one quarter of the global oil supply passes through that corridor.³

You can think of the strait a bit like a major airline hub like Atlanta or Chicago. When everything is running smoothly, traffic flows through without much notice. But if that hub faces disruption, delays can spread across the entire country.

And that’s exactly what we’ve seen in recent days.

With ship traffic into and out of the Persian Gulf pretty much halted, it doesn’t take long for storage reserves to run dry and shortages to appear. Those worries briefly sent oil prices over $120 per barrel as the conflict escalated.⁴

Like an airport hub getting disrupted, soaring energy costs send ripple effects through the whole system.

Higher oil prices flow through transportation, manufacturing, and everyday goods. Simply put, oil touches almost everything.

The worry is that this could lead to higher inflation and slower growth.

But while moments like this can feel unprecedented, history offers a helpful perspective.

Since World War II, markets have navigated more than 20 major geopolitical shocks.

On average, the S&P 500 dropped roughly 5% from the initial headlines to the market’s low point.⁵

Many of the biggest reactions were tied to energy.

The 1970s Arab oil embargo and Russia’s military operation in Ukraine both sent oil prices surging and markets on edge.

That may sound unsettling.

But here’s the other side of the story.

Historically, markets have tended to recover those losses within about six weeks.⁵

That does not mean every situation unfolds the same way. Every conflict is different, and markets do not move in a straight line.

But the pattern is consistent.

Markets often react quickly to geopolitical shocks. They just do not tend to stay down because of them.

Why might this be?

Because economies generally have a habit of adapting, sometimes faster than we expect.

Over time, people respond to higher energy prices in practical ways.

• Energy supply grows. When oil prices rise, producers notice. Higher prices encourage more drilling, more exploration, and more investment in new energy sources. Over time, supply often increases.
• Governments rethink energy strategy. Energy shocks often lead governments to expand domestic production, build infrastructure, or invest more heavily in alternative energy.
• Businesses become more efficient. Companies look for ways to reduce costs. Airlines invest in more fuel-efficient aircraft. Manufacturers upgrade equipment. Logistics companies redesign shipping routes to use less energy.
• Households adapt too. Families adjust over time. Some move closer to work. Others choose more fuel-efficient vehicles or make home upgrades that reduce energy use.

Of course, none of these changes happen overnight. But they happen often enough that economies have become remarkably good at adjusting to changing conditions.

As we know, every situation unfolds differently. Markets can react in unexpected ways. And there‘s still a great deal of uncertainty around how events in the Middle East will develop.

But that adaptability is one reason markets often stabilize long before the underlying conflict is resolved.

What’s our takeaway?

Moments like this are undoubtably unsettling. It’s a normal reaction.

Markets don’t like uncertainty, and global conflicts create lots of it.

But volatility is also a normal part of investing. Even in strong years, markets often experience temporary pullbacks along the way.

A portfolio built around long-term goals and thoughtful diversification is designed with periods exactly like this in mind.