The United States and Israel launched military actions against Iran on February 28, swiftly unsettling global financial markets. Investors are widely concerned about whether this conflict will trigger a sharp decline in the U.S. stock market. Looking back over the past ninety years, while major geopolitical events often cause short-term market volatility, actual stock market crashes have been rare, with the stability of oil supply being a critical variable.
Over the long term, Wall Street stands as the world’s most powerful wealth creation engine. The S&P 500 Index has never posted a loss in any consecutive 20-year rolling period. Meanwhile, the Dow Jones Industrial Average and the Nasdaq Composite Index have frequently risen in tandem with the S&P 500, repeatedly setting new record closing highs. However, the short-term direction of the stock market is fraught with uncertainty, especially when significant geopolitical factors come into play.
Historical data indicates that major geopolitical events can indeed trigger brief panic trading under specific circumstances. Over the past nine decades, the world has witnessed numerous significant events, including wars, terrorist attacks, assassinations of leaders, invasions by other countries, and financial crises. While most of these events prompted emotionally driven trading behavior, exacerbating short-term market fluctuations, instances leading to a full-blown stock market crash have been relatively rare.
Among these numerous events, one variable significantly increases the risk of a stock market crash: oil. When global energy supplies are disrupted or face the risk of being constrained due to geopolitical conflicts, the likelihood of a significant short-term downturn or even a temporary crash in the stock market rises substantially. For example, in the three weeks following Iraq’s invasion of Kuwait in August 1990, the S&P 500 lost 13% of its market value. In October 1973, after Arab members of OPEC imposed an oil embargo on certain nations supporting Israel (including the United States), the S&P 500 fell 17% in less than two months and plunged approximately 44% over the subsequent 11.5 months.
When oil supplies are restricted, spot prices surge. Following the commencement of military actions against Iran this time, with the Strait of Hormuz closed to most oil exports, the spot price of West Texas Intermediate crude has skyrocketed 36% this week. Besides directly pushing up oil prices, a surge in oil prices can negatively impact corporate hiring activities and compress profit margins across multiple industries. Therefore, while ninety years of history cannot predict the future, the probability of this conflict triggering a market crash is indeed higher compared to other geopolitical events.
However, the non-linear nature of economic cycles also provides a basis for long-term optimism. Although history suggests market turbulence is inevitable, decades of economic cycle data also reveal the importance for investors to maintain a long-term perspective.
According to data compiled by Ryan Detrick, Chief Market Strategist at Carson Group, since World War II, one year after a major geopolitical event, the S&P 500 has been higher than its level at the time of the event 65% of the time. Although the average annual return of 3% appears slightly modest compared to the stock market’s long-term annualized returns, the probability of optimism ultimately prevailing remains relatively high.
This implies that even if the Iran conflict eventually triggers a market crash, historical experience suggests such a decline would be short-lived. For patient, long-term investors, it could instead present a rare buying opportunity.
