Executive Summary: Traders react to war and geopolitical shocks, but market history shows investors shouldn’t panic. More often than not, stocks have gained ground in the aftermath of conflict, rewarding those who stay the course.
The world feels ablaze with war and geopolitical tension. Ukraine continues its determined defense against Russian aggression. Meanwhile, following Israel’s strikes intended to halt Iran’s nuclear ambitions, the two adversaries have been exchanging missiles.
The human toll of these and countless other conflicts, both past and present, is enormous. Nothing in the analysis that follows is meant to diminish that reality. However, this is an investment newsletter, so the question I want to address is: What is the impact on long-term investors when armed conflict erupts?
Stocks have been resilient despite missiles flying in the Middle East—500 Index (VFIAX) fell 1.1% on Friday but rebounded 1.0% on Monday. So, we can address this question from a position of relative market calm.
The best way to answer that is to take a thoughtful walk through market history, examining how traders reacted to defining geopolitical events—and how their opposites, patient longer-term investors, ultimately came out ahead.
In the moment, markets react to geopolitical events. That’s only natural—after all, markets are made up of people. And when unexpected shocks hit the world stage, our “fight or flight” instinct kicks in. For traders, that typically means selling first and asking questions later.
But after the initial sell-off, markets tend to adjust, and over time, generally resume their previous path. Why? Because wars damage local economies and companies, but rarely spiral into something that derails the global economy, impairs corporate earnings, or sparks lasting, materially higher inflation. (The clear exceptions are the two World Wars, which I’ll come back to in a moment.)
In fact, rather than providing a reason to sell, geopolitical shocks—and the markets’ knee-jerk reaction to them—tend to create opportunities. For long-term investors, these moments have often been good times to buy, not sell.
Here is the evidence supporting that claim.