It’s been a week since the first strikes on Iran, from U.S. and Israeli forces, and investors have not yet figured out what to make of it. On Monday, the first day of trading since the strikes, the headlines were dire. I woke up reading that the markets were sinking. But, the drop was no more significant than any given day, retreating less than a percent.
By Tuesday, more fear set in and the S&P 500 Index was down more than 2% for much of the day, although it reversed course and closed down less than 1%.
The market moves are a reminder that global turmoil is not a reason to panic as an investor. The short-term reactions are just that – short term.
Oil Supply Risk: The Real Economic Threat from the Iran Conflict
It is true that the longer a conflict lasts, the larger impact it could have on the global economy and stock markets. In the current conflict, the biggest economic threat is on oil. The conflict is being carried out close to one of the largest transportation corridors for oil. If those transports are threatened, or disrupted there would a real world effect that would drive up prices at the pump.
Iran’s retaliation has also targeted the oil producing infrastructure of many countries in the region, adding to fears of what LPL calls “perceived supply risk.”
Historical Market Performance During Geopolitical Shocks
But history tells us, investors will be better off just riding all of this out. Take a look at this chart from LPL Research. This shows more than two dozen major geopolitical events since World War II. This includes everything from the Pearl Harbor attack to the Kennedy assassination, to 9/11.
The average one day decline of the S&P 500 Index is just 1%. Also, on average, markets tend to absorb shocks quickly hitting bottom within 18 days. And, it takes, on average, less than 39 days for the S&P to get back to pre-event levels. It is important to note, that the scale of the initial event is not necessarily a predictor of the magnitude of the market impact.
Take the September 11th attacks for example. The fallout from those attacks lasted years. But, the S&P 500 reached its bottom in 11 days and had fully recovered in 31 days.
Recession Risk vs. Geopolitical Headlines: What Really Drives Markets
What is a better predictor of the long-term impact that a global shock has on the stock market is whether the economy is close to a recession. According to LPL, if the shock occurs during an expansion, markets are usually positive over the next three, six, and 12 months. But, if a shock occurs near a recession, and you could argue the event causes the recession, markets are typically negative across all those timeframes.
As LPL puts it, the consistent takeaway is that shocks cause volatility, but rarely change the long-term trajectory of the economy, unless accompanied by a deeper fundamental stress.
Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.
