The war in Iran and the disruption to oil and gas supplies passing through the Strait of Hormuz have triggered a sharp rise in energy prices and increased volatility in equity markets. Given their greater dependence on imported energy, equity markets in Europe and Asia have fallen more sharply than in the US, which, thanks to the shale revolution, has been a net energy exporter since 2019.
Suffering losses in one’s equity portfolio is painful. However, market volatility triggered by geopolitical events is a recurring feature of financial markets and rarely alters the long-term trajectory of the global economy or corporate profits. While such episodes can be unsettling, investors should keep several important considerations in mind before reacting to short-term market moves.
Volatility is a normal part of investing
It has been said many times before, but at times like this, it is worth repeating that market fluctuations are an unavoidable feature of equity investing. Such volatility is the price investors must pay for the superior long-term returns as equities have historically delivered relative to bonds and cash.
History has shown that even though markets can experience significant falls during a calendar year, actual annual returns are more often than not positive. According to Goldman Sachs, the annual returns of the MSCI All-Country World Index (ACWI) were positive in 34 of the past 45 years despite the index experiencing median intra-year drops of 15% [1].
Investor anxiety regarding losses in portfolios is often amplified by the way market developments are reported. Sharp market declines typically dominate headlines, while the steady day-to-day gains that generate long-term returns rarely attract the same attention. As a result, investors can develop a distorted perception of risk, overemphasising short-term volatility while underappreciating the powerful role of compounding in building wealth over time.
The market impact of wars tends to be short-lived
The tendency for markets to recover after periods of decline is also evident in their performance around the outbreak of military hostilities. According to analysis by Morgan Stanley of 22 military conflicts between the Korean War of 1950 and the start of the Russia-Ukraine War in 2022, the S&P 500 index of leading US companies rises on average 5.9% and 8.4% after six and twelve months respectively of the hostilities breaking out [2].
The notable exception was following the Yom Kippur War of 1973, when oil prices quadrupled and prompted a spike in inflation and a recession, i.e. stagflation [3]. Twelve months after the outbreak of the Yom Kippur War, the S&P 500 was down 43% according to Morgan Stanley.
However, there are good reasons to expect the impact of an oil price spike to have a less dramatic impact on global growth and equity markets this time around. Crucially, the oil intensity of Gross Domestic Product (GDP) has fallen sharply since the 1970s.
In 1973, it took nearly one barrel of oil to produce US$1,000 of global GDP (in 2015 prices). By 2019, that figure had dropped to approximately 0.43 barrels - a decline of over 55% [4]. This reflects improvements in energy efficiency as well as a shift in advanced economies away from energy-intensive manufacturing toward services.
In addition, the predominance of independent central banks, well-anchored inflation expectations and less rigid labour markets serve to make a sustained period of very high inflation less likely. What’s more, the US (the world’s largest economy) has been an annual net total energy exporter since 2019.
Nobody knows for certain what will happen to the oil price going forward. However, the scale of the current price spike is not yet comparable to that of the 1970s. At the time of writing, Brent Crude has risen approximately 43% from pre-war levels to trade at US$102.50 per barrel [5].
This is a significant move, but one that falls far short of the 400% surge that hobbled global markets in 1973. Furthermore, futures markets suggest that oil prices above US$100 are likely to be relatively short-lived, with prices expected to fall back to around US$80 per barrel by the end of the year [6].
Missing out on the best market days is costly
Another point investors should bear in mind is that during periods of geopolitical uncertainty, volatility can work in both directions. Equity markets in Europe and Asia have seen large daily falls since the US and Israel launched their attack on Iran on 28 February.
However, shifts in the news flow and investor sentiment have also produced days when markets have rebounded sharply. These wild swings have been most evident in South Korea’s equity market.
The country imports around 98% of its fossil fuels [7], with roughly 70% of its oil sourced from the Middle East [8]. As a result, South Korea is especially vulnerable to an energy supply shock, and its equity market has been among the hardest hit by investor selling since the war began.
For example, on 4 March the Kospi - South Korea’s main stock market index - fell 12%, its largest daily decline on record. Yet the following day, on 5 March, the index rebounded by 9.6% [9].
The recent experience in South Korea provides an extreme example of the tendency for an equity market’s best and worst days to be clustered together. In a study of the US equity market during the period 2005 to 2024, JP Morgan found that seven of the S&P 500’s best days occurred within two weeks of the ten worst days, with six of those strong rebounds coming immediately after the largest declines [10].
This pattern underlines the danger of reacting emotionally when markets fall sharply. Investors who sell during periods of stress risk missing the powerful rebounds that frequently follow major declines.
Research by JP Morgan illustrates the potential cost of such mistiming.
Between 2005 and 2024, a US$10,000 investment in US equities would have grown to US$71,750 if it had remained fully invested. However, missing just the 10 best trading days would have reduced the final value to US$32,871. Missing the 20 strongest days would have lowered the outcome further still, to only US$19,724 [11].
Of course, the reverse is also true: avoiding the market’s worst days would significantly improve returns. However, the difficulty lies in achieving this while still remaining invested for the market’s strongest rallies, which often occur soon after sharp declines.
Successfully doing both would require near-perfect foresight. In reality, most investors lack such abilities, which is why the long-standing advice from financial advisers remains sound: time in the market beats trying to time the market.
Equities tend to deliver inflation-beating returns
The rise in energy and other commodity prices resulting from the conflict in the Gulf is expected to push inflation higher. While the prospect of rising inflation can create volatility in equity markets - not least because it may keep interest rates higher for longer - history suggests that equities are more likely to outpace inflation over time than either cash or bonds.
According to data from Schroders on returns from the S&P 500 and US dollar cash between 1926 and 2025, even over a relatively short 12-month holding period, US equities beat inflation 71% of the time compared with 59% of the time for cash [12].
The longer the investment horizon, the more reliable equities become as a defence against inflation. Over rolling three-year periods, equities have beaten inflation 77% of the time, whereas cash has succeeded only 54% of the time. Over ten years, the success rate for equities rises to around 87%, compared with just 54% for cash.
Over twenty-year periods the difference becomes even starker: equities have always delivered returns above inflation, while cash has done so only around 64% of the time. Equities are more likely to outperform cash and bonds for several reasons.
Equities represent a claim on companies that own real assets - such as factories, land and technology - whose value tends to rise with the general price level. Firms also have the ability to raise the prices of their goods and services when costs increase, particularly if they possess strong pricing power.
In addition, corporate profits benefit from improvements in productivity and innovation, whether through new technology or more efficient management. As a result, company earnings tend to grow faster than inflation over time.
Looking beyond the headlines
Ultimately, while the headlines of war and energy shocks naturally provoke a flight-to-safety instinct, history suggests that such a reaction is detrimental to achieving long-term, inflation-beating returns. Although the outlook remains uncertain, hostilities are likely to end at some point, and equity markets are likely to experience a significant bounce when they do.
As we have seen, missing out on such up days can prove costly for investors. Experience tells us that the greatest risk to long-term investors is not geopolitically-driven volatility but abandoning the market in response to it.
19 March 2026
[2] https://thedailyshot.com/2026/03/09/oil-surges-above-100-as-the-iran-conflict-rages-on/#equities
[3] https://en.wikipedia.org/wiki/1973_oil_crisis
[4] https://www.energypolicy.columbia.edu/publications/oil-intensity-curiously-steady-decline-oil-gdp/
[5] https://tradingeconomics.com/commodity/brent-crude-oil
[6] https://www.barchart.com/futures/quotes/CB*0/futures-prices
[7] https://www.eia.gov/international/overview/country/KOR