When a major geopolitical event happens, We can always count on three things happening. First, there will be headlines. Sometimes positive, sometimes negative, but nearly always sensational. Second, there will be a reaction in the markets. Sometimes positive, sometimes negative, but nearly always sharp. And third, our inbox will light up with emails from friends and family who understandably want to know what this all means and what they should do about it.
All this happened on Friday, June 13th, after the news broke out that Israel had launched military strikes against Iranian nuclear facilities and military bases. In response, two different markets went two different ways. Stock prices slid downwards, while oil prices shot sharply upwards.1 Both were due to the worry that the strikes would lead to larger-scale fighting in the Middle East. If that were to happen, the world’s oil supply — to which Iran is a major supplier — could contract, leading to even higher prices. This, in turn, could affect trade across the globe and drive inflation higher.
Since we are financial advisors we will leave military concerns to the generals, and political ones to the politicians. The question we were most interested in – and the question many people have asked us – is what this all means for us as investors. Since we don’t have a crystal ball, there’s no way we can know for sure. But history suggests that it won’t have much effect at all, or for very long.
The financial industry often likes to stress that “past performance is no guarantee of future results.” The reason is because we’ve seen time and again that just because something happened a certain way before doesn’t mean it will automatically happen that way again. On the other hand, there’s another saying that’s equally valid: There’s nothing new under the sun. In this case, international crises are nothing new. That means we have a lot of history to turn to when trying to gauge how tensions in the Middle East might impact the markets.
Think back on all the major international events we’ve lived through. Terrorist attacks and wars. Elections and economic recessions. The Cuban Missile Crisis. The JFK assassination. The 1973 Arab oil embargo. The fall of the Berlin Wall. The 9/11 attacks, Brexit, and COVID. The Russian invasion of Ukraine. Unless you’re very young, you’ve witnessed many periods full of tension, drama, and importance.
But they rarely have much effect on the markets. Or rather, they rarely have a sustained effect.
Take the Cuban Missile Crisis. The world has probably never been closer to nuclear war than those nerve-racking thirteen days in 1962. Yet during that time, the Dow only fell 1.2%. By the end of the year, the Dow was up 10%.2 More recently, look at Brexit. When the UK voted to leave the European Union, it took most analysts by surprise, and many predicted it would lead to a major drop in the markets. At first, it did. The vote took place on a Thursday. The next day, the Dow fell over 600 points, and then another 250 points the Monday after.3 But less than a month later, the Dow climbed to a new record high.4
Of course, major events will sometimes cause a larger drop. When World War I began, the Dow fell 30%, then closed for six months.2 After the 9/11 attacks, stocks dropped almost 15% over a two-week period.2 And when the COVID pandemic began, the markets crashed in spectacular fashion, falling nearly 20% in a month.5 But in each of these cases, the markets recovered with surprising speed. In 1915, the second year of World War I, the Dow rose more than 88%.2 After 9/11, it took just a few months for the markets to recover.2 And even as the world practiced social distancing during COVID, the stock market regained its previous levels four months later.5
A similar phenomenon is often seen in oil markets, too. After Russia invaded Ukraine in early 2022, oil prices skyrocketed. A year later, the market had “fully absorbed” the impact of the invasion, and prices retreated to more normal levels.6
To understand why this is, we like to think about the difference between an acute illness and a chronic illness. The former usually develops suddenly but only lasts for a few days or weeks. A chronic condition, on the other hand, often develops slowly and gets worse gradually. It can last for months, years, even decades. Acute illnesses — like the stomach flu — feel miserable, but we usually get over them quickly because there’s nothing systemically wrong with our bodies. But a chronic illness means something inside us is not working the way that it should.
For investors, a geopolitical event is usually the equivalent of an acute illness for the markets. It comes on suddenly. Investors react to it much like our immune systems react to a virus. (It’s our own immune system, remember, that causes most of the unpleasant symptoms we feel when sick.) But if the event subsides or fails to spread, which is often the case, the markets adjust, and investors move on. There’s nothing systemically wrong with the markets or the global economy. This is why it’s so important to not overreact to headlines or make major changes to our investment strategy, just as we wouldn’t completely change our lifestyle or medication regimen because of a stomach bug.
Now, it’s important to note that acute conditions can develop into chronic ones. This is true for our bodies and for the markets. Analysts and economists often ponder the possibility of contagion, where a problem spreads from one area to another. When this happens, it can either cause or reveal systemic problems in the markets, and the symptoms become much worse and last much longer. The best example of this is probably the financial crisis of 2008, where a combination of factors — a housing bubble, over-speculation in risky assets, and others — caused a recession that lasted nearly two years. In that case, there was something fundamentally unhealthy about the economy, and the markets suffered a chronic illness as a result.
In this case, we do need to keep an eye on the possibility of contagion should this conflict widen or persist for an extended period. And we should be prepared for further volatility in the oil market over the coming days, which in turn could affect the stock market.
But the big takeaway is to remember that geopolitical events of this nature are surprisingly common…and often surprisingly short-lived. There’s a reason you will never see our team overreact to them, because we are always asking ourselves: Is this an acute event, or a chronic condition?
Naturally, it’s impossible to know what will happen next, but our team will continue to keep our heads up, our eyes open, and focus on our long-term strategy. In our experience, the ability to do that is more valuable than any crystal ball.
As always, if you have any questions about the markets, never hesitate to ask. We are here for you. In the meantime, enjoy your summer!
Sincerely,
The Omell Financial Group
1 “Dow drops more than 800 points as Israel-Iran tensions intensify,” CNBC, www.cnbc.com/2025/06/12/stock-market-today-live-updates.html
2 “How Markets Respond to Geopolitical Crises,” A Wealth of Common Sense, https://awealthofcommonsense.com/2017/06/how-markets-respond-to-geopolitical-crises/
3 “Dow plunges over 600 points as U.K. ‘earthquake’ crushes global markets,” CNN Business, https://money.cnn.com/2016/06/23/investing/eu-referendum-markets/index.html?iid=EL
4 “Stocks have never been higher,” CNN Business, https://money.cnn.com/2016/07/12/investing/dow-stock-new-high-record/index.html
5 “What We’ve Learned From 150 Years of Stock Market Crashes,” Morningstar, https://www.morningstar.com/economy/what-weve-learned-150-years-stock-market-crashes
6 “Oil market has fully absorbed impact of Russia’s invasion of Ukraine,” Reuters, https://www.reuters.com/business/energy/oil-market-has-fully-absorbed-impact-russias-invasion-ukraine-kemp-2023-03-09/
Original by BGM Head Writer Matthew Bailey
Sourced from Bill Good letter’s Library.
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