War, Oil Price Shocks and Stock Prices

April 2026

 

There is an expression attributed erroneously to the Chinese that says, “May you live in interesting times.” Used more as a curse than a blessing it is thought to be an English derivative of a real Chinese saying, “Better to be a dog in times of tranquility than a human in times of chaos.” I like that better.

 

Either way, these days are both interesting and chaotic for investors. We find ourselves making portfolio decisions amid a war in the Middle East and an oil supply shock not seen since 1990. *

 

Geopolitical events such as armed conflicts tend to rattle markets in the short term. The data shows, however, that share prices recover quickly.

 

Major market downturns in the past such as 1929, 2000 and 2008 were the result of failure in the economic structure at the time. The system was broken and needed policy changes and time to recover.

 

As Michael Hiltzik of the Los Angeles Times wrote* the market reaction to previous wars is instructive. When Pearl Harbour was attacked in December 1941 the Stock Market dropped 11% over 3 months. A year later it recovered that and added 4.3%. The breakout of war in Korea resulted in a 12.9% correction in 2 weeks. It recovered all of this in 56 days.

 

Hiltzik goes on to review the stock market response to the last major oil supply shock. When Iraq took over the Kuwaiti oil fields in 1990 stocks dropped 16% in a few weeks but recovered 4 months later.

 

The major risk now is that the current oil supply disruption created by the closing of the Strait of Hormuz and the damage to energy infrastructure in the Middle East worsens. The economic consequences would be more serious and stock prices would be lower for longer.

 

Following the US and Israeli attack on Iran, February 28, 2026, the S&P dropped from approx. 6,900 to a low on March 27, 2026 of 6,347 or - 8%. Regardless of the current events at the time the S&P declines 10-15% from it is high at least once every 18 months. From an all time high of 7002 the S&P has fallen approx. 9.5% as of March 27, 2026. Is that the low for this cycle? I believe it is.

 

The US economy went into this crisis in particularly good shape. Not all Americans are participating in the wealth creation going on and that is tragic. Nonetheless Corporate earnings continue to accelerate. Inflation, unemployment, and interest rates are low by historical averages. This strength should provide a buffer to the economic costs of the current conflict in the Middle East.

 

 

 

*Michael Hiltzik, Las Angeles Times 03/26

**S&P Data courtesy of Federal Reserve Bank of St. Louis and “Political Calculations.blogpost.com”