by Sean Sparkman

Pathfinders Wealth

Retired and soon-to-retire investors may feel somewhat unsettled by current global instability, especially as the United States has entered a new conflict with Iran.  News of conflict, rising tensions, or trade disturbances can prompt concerns about hard-earned savings. After decades of planning, the prospect of global turmoil threatening financial security is understandably alarming.

History offers some perspective. While geopolitical shocks may create short-term uncertainty, market dynamics have remained consistent over time. Markets often react quickly to turbulence but usually recover faster than expected.

Decades of historical data show that market performance is more closely tied to economic fundamentals than to geopolitical headlines.

Why do markets move so quickly when there is conflict?

Financial markets are essentially forecasting machines.  Investors constantly attempt to anticipate how future events might affect economic growth, corporate profits, inflation, and interest rates.

When a military conflict erupts, those forecasts suddenly become more challenging to make. Questions arise almost immediately:

  • Will the conflict spread to other regions?
  • Could global energy supplies be disrupted?
  • Will trade routes or supply chains be affected?
  • How will governments respond?

With no clear answers, investors might respond defensively.  Stocks may decline as money flows toward traditional safe havens such as government bonds, cash, or precious metals.

Fortunately, uncertainty rarely lasts forever.  Once the scope of a conflict becomes clearer, markets typically stabilize and adjust to the new reality. In many cases, this adjustment happens much faster than the headlines would suggest.

Modern conflicts tell us an interesting story

Recent international incidents provide useful examples of how markets behave during periods of global tension.

For instance, when Russia invaded Ukraine in February 2022, markets became volatile. The S&P 500 dropped about 8 percent over three months.  The conflict threatened global energy, food supplies, and strained supply chains.

Yet there were other conflicts that produced very different outcomes.

In October 2023, after the Hamas attack on Israel, the S&P 500 rose about 10% over the next three months.

Following the Sudan civil war that started in April 2023, the S&P 500 gained nearly 9 percent. After Kabul fell in August 2021, stocks rose about 5 percent.

It might seem illogical to you that conflicts dominating the news often have little lasting impact on financial markets.

To understand why this is the case, it helps to look at a longer historical timeline.

There is a long history of market durability

Since the mid-20th century, the world has experienced numerous geopolitical shocks: Pearl Harbor, the Korean War, the Cuban Missile Crisis, the Gulf War, and the terrorist attacks of September 11, among others.

Each event created tremendous uncertainty in the moment. Investors feared the unknown and questioned how global events might alter the economy.

But when economic researchers examined how markets actually behaved after these shocks, they found a consistent pattern. According to an historical analysis of world political events since World War II, the average decline in the S&P 500 following such events has been relatively modest at about 5%.  Markets typically bottom out within several weeks and then recover within one to two months.

Several of the historical events researchers studied illustrate this clear pattern:

  • During the Cuban Missile Crisis in 1962, the S&P 500 dropped about 7 percent and recovered within weeks.
  • After the September 11 attacks, the S&P 500 fell around 11 percent but recovered within a month.
  • Stocks also recovered following the 1990 Gulf War, even during a recession.

What is the “War Puzzle” and how does it influence investor expectations?

Economists sometimes refer to a situation known as the “war puzzle.” It reflects the observation that markets sometimes behave in unanticipated ways around military conflicts.

One explanation is that markets respond differently depending on whether a conflict is anticipated or arrives suddenly. When tensions build due to diplomatic disputes, troop movements, or sanctions, markets often begin adjusting well before the conflict formally begins.

In contrast, unexpected events may trigger sharper short-term reactions because investors have little time to adjust expectations. Even then, however, the market’s recovery can come quickly once the situation becomes clearer.

Another interesting pattern develops when we examine markets one year after major geopolitical shocks.

Historical research examining armed conflicts since World War II shows that the S&P 500 has been higher roughly 70 percent of the time one year after the onset of conflict. Average one-year returns tended to be in the high single digits.

This doesn’t mean markets ignore geopolitical risks. Rather, it shows that markets ultimately respond to much wider economic forces such as corporate earnings, productivity growth, innovation, and monetary policy.

International events may cause short-term market volatility, but fundamental economic trends usually guide long-term performance. The key takeaway is that, despite global tensions, markets typically recover and continue to grow over time.

So, when DOES geopolitics matter to the economy?

That said, not all conflicts are equal. Some world events can have deeper economic consequences particularly if they affect energy supplies.

The oil embargo of the 1970s is a prime example.  In response to tensions in the Middle East, oil-producing nations restricted exports to Western countries. Energy prices surged, inflation accelerated, and the global economy entered a very challenging period.

More recently, the invasion of Ukraine contributed to spikes in energy and food prices, adding inflationary pressure to an already fragile post-pandemic economy.

The key thing to remember is that critical markets do not simply react to the presence of conflict. They react to how that conflict might affect economic growth.

If a global event does not materially disrupt the global economy, markets often move past it surprisingly quickly.

Which sectors win and which lose during a conflict?

Energy companies may profit when conflicts push oil prices higher. Defense and aerospace firms could experience increased demand as governments expand military spending. Precious metals such as gold and silver attract investors who want a store of value during difficult times.

On the other hand, industries like airlines and trucking can face immediate pressure due to higher fuel costs and disrupted routes. Companies focused on discretionary and luxury items may also struggle if rising energy prices reduce household spending.

Still, trying to predict your financial moves based on geopolitical headlines can be intensely frustrating.  By the time an investor acts on current events, markets have often already begun adjusting.

The economy is the variable that matters most

Ultimately, the most crucial factor for investors is not whether a conflict occurs, but whether it triggers a more extensive economic slowdown.

Historical data show an obvious difference in outcomes depending on this variable. When military conflicts occur while the economy remains strong, markets may continue to rise over the months that follow. When conflicts coincide with recessions, market declines have tended to be more pronounced and longer-lasting.

In other words, the health of the underlying economy matters far more than the conflict itself.

What lesson can long-term investors learn?

Every generation of investors experiences moments when the world appears unusually unstable. Wars, political crises, and international strife have been recurring features of modern history.

Throughout these periods, financial markets have continued to expand alongside the global economy.

For investors nearing or in retirement, the lesson is to keep geopolitical risks in perspective. Rather than making decisions based on headlines, focus on the long-term market robustness demonstrated throughout history.

Knowing this, having a well-diversified portfolio, thoughtful asset allocation, and regular portfolio reviews can help ensure that your retirement plans stay on track even amid the turbulence.

Worldwide events can feel unprecedented, but history shows that markets recover and move forward. Staying focused on the bigger picture supports investment success.

As always, it’s my pleasure to offer you a second set of “eyes” with a comprehensive portfolio review.  If you need guidance during these unpredictable times, or if you want a second opinion about your current strategies, please contact me at Pathfinders Wealth.

As an Accredited Investment Fiduciary® I am legally obligated to prioritize my clients’ interests above my own. I am also committed to providing exceptional fiduciary care beyond that of other advisors. You can ask your questions or get an appointment with me by calling (248) 487-9148 during regular business hours.

I look forward to assisting you in creating a prosperous future!
Sean R.Sparkman
Pathfinders Wealth

Cell: (248) 325-7059
Office: (313) 246-9278
www.pathfinderswealth.com