Market Response to Conflict: What Investors Should Know
History shows regional conflicts rarely derail global markets. Here’s what investors should focus on now.
Markets Do Not Panic Over Every Conflict—Investors Shouldn’t Either
The headlines coming out of the Middle East this week are unsettling. Investors are undoubtedly wondering how ongoing military strikes, retaliatory attacks, threats of wider escalation, and shocks to energy markets could impact the global economy. These are all valid concerns, and I empathize with the uncertainty many readers are likely experiencing.
But when we step back and analyze events strictly through a market lens—which is our job here at Zacks—history shows something important: regional conflicts rarely alter the long-term trajectory of global markets, unless they materially disrupt global economic activity.1
As ever, history is the most useful guide we have in these situations. Over the last 75+ years, there is ample evidence to show that regional wars and geopolitical flare-ups have no consistent relationship with recessions or prolonged bear markets. Markets often experience short-term volatility in the run-up to and immediate aftermath of conflict, which investors should expect to see in the coming days and weeks.
Headlines about conflicts can spike short-term volatility and make it tempting to react. But the real focus for investors is understanding how these events affect markets and your portfolio. The key is staying disciplined, managing risk, and keeping your long-term plan on track.
Navigating Market Volatility 2 is a free guide that helps investors step back, evaluate risk, and make clear-headed decisions when headlines create uncertainty. Download it to learn:
Sharp market declines and corrections are a normal part of investing
The best market days come unexpectedly (often within days or weeks of the worst days)
Trying to pick market tops and bottoms is nearly impossible
Trust your strategy and discipline, not the headlines
Plus, more insights and assistance to help you keep your investment strategy on course
If you have $500,000 or more to invest, get your free volatility guide today!
But once markets assess the scope and economic reach of the conflict, equities tend to refocus on fundamentals.
Indeed, in modern market history, only World War II independently caused a sustained bear market by materially impairing a significant portion of global productive capacity. More recent conflicts—including the Iraq wars, the Bosnian War, the Gulf War, the Syrian civil war, and the recent Gaza War—produced volatility, but markets ultimately moved on once the economic transmission channels became clearer. One exception may be the Russia-Ukraine war, but that conflict collided with a post-Covid supply chain crisis, soaring inflation, and rapidly rising interest rates. We’re not seeing those types of conditions today.
In the current situation, perhaps the biggest investor focus is on energy markets. Oil is the most immediate economic variable, since roughly 20 million barrels per day (about 20% of global oil production) move through the Strait of Hormuz. To be fair, a meaningful or prolonged disruption there would have implications for inflation, corporate margins, and consumer spending. It’s a factor to watch.
Brent crude prices are on the rise (chart below), but as I write, prices remain well within the range seen over the past several years. Remember, from 2011 through 2014, Brent traded above $110 per barrel for an extended period, during years that coincided with economic expansion and a rising equity market. Rising oil prices alone are not automatically a harbinger for recession.
Global Price of Brent Crude, 2003 - Present
Source: Federal Reserve Bank of St. Louis 3
What matters is duration and scale. A temporary spike driven by uncertainty is very different from a sustained supply shock that meaningfully removes production from the global system. And so far, energy markets are not behaving as though investors expect a prolonged shutdown of supply.
This could change, of course, and we’ll be watching closely. But it’s also true that the Strait of Hormuz has not been seriously closed since the 1980s, even during periods of heavy regional fighting. Despite recurring fears over the decades, oil shipments have largely continued to flow. Energy markets are adaptive—producers adjust output, shipping routes can be rerouted where possible, strategic reserves can be deployed, and high prices themselves encourage additional supply.
Natural gas adds another dimension to the energy discussion, particularly for Europe and Asia. In 2022, when Europe scrambled to replace Russian pipeline gas, benchmark European natural gas prices soared to extraordinary levels amid fears of winter shortages. That spike was driven not just by conflict, but by a sudden structural loss of supply combined with low storage levels heading into heating season.
Today’s environment looks materially different.
While recent attacks have temporarily raised concerns around LNG production in parts of the Gulf region, global gas inventories are not in the same fragile position they were three years ago. Europe has diversified supply sources, expanded LNG import capacity, and improved storage buffers. Prices have moved higher in response to uncertainty, but they remain far below the extreme levels reached during the 2022 energy crisis.
Importantly, U.S. natural gas prices, which are often a useful barometer of global LNG tightness, have not exhibited the kind of surge typically associated with a sustained global shortage. That suggests markets are pricing risk, not permanent supply destruction. We’re also moving out of winter, which could be an important demand factor.
Could energy prices move higher from here? Certainly. Markets will continue to incorporate new information as the situation evolves. But for this conflict to meaningfully alter the economic trajectory, disruptions would need to be large, sustained, and broad enough to materially impair global demand. That is a high threshold, and I don’t think investors should act as though it’s a foregone conclusion.
Volatility in response to geopolitical events is normal. It has been a feature of markets for decades. The key distinction investors must make is between unsettling headlines and structural economic damage. And at this stage, I do not see evidence of the latter.
Bottom Line for Investors
The situation in Iran deserves close monitoring, particularly in energy markets. Oil, and to a lesser extent, natural gas, are the primary economic variables to watch. If prices spike sharply and remain elevated, volatility could persist.
But history suggests that regional conflicts tend to produce temporary market disruptions rather than lasting bear markets. The broader economic backdrop of moderating inflation, resilient labor markets, steady earnings growth, and improving market breadth remains intact. Those forces tend to drive longer-term market direction far more than regional conflicts, unless the conflict fundamentally alters global production or consumption patterns. We’re pretty far from that outcome today, in my view.
Markets can swing fast when headlines hit, but reacting on impulse can cost you. During these turbulent times, I recommend downloading our guide, Navigating Market Volatility 4. It shows investors how to stay steady, manage risk, and protect income when markets move sharply.
Inside, you’ll also learn how to:
Sharp market declines and corrections are a normal part of investing
The best market days come unexpectedly (often within days or weeks of the worst days)
Trying to pick market tops and bottoms is nearly impossible
Trust your strategy and discipline, not the headlines
Plus, more insights and assistance to help you keep your investment strategy on course
If you have $500,000 or more to invest, access your free volatility guide today.
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2 Zacks Investment Management reserves the right to amend the terms or rescind the free Navigating Market Volatility: 4 Principles for Staying the Course offer at any time and for any reason at its discretion.
4 Zacks Investment Management reserves the right to amend the terms or rescind the free Navigating Market Volatility: 4 Principles for Staying the Course offer at any time and for any reason at its discretion.
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