When Markets Face War

It always feels a little strange writing about markets when the headlines are dominated by conflict.

People are being harmed. Families are living through real fear and uncertainty. And at the same time, markets continue doing what they always do—pricing risk, adjusting expectations, and reacting to new information.

As investors, it’s important to acknowledge both realities. The human cost of these events matters far more than market movements. But markets don’t pause during global events, and understanding how they typically respond can help us avoid emotional decisions.

One pattern that has appeared repeatedly in history is this: markets often experience the most stress before a conflict becomes clear, not necessarily after it begins.

That sounds counterintuitive. Most people assume the worst moment for their portfolio is when the conflict actually starts. But in many cases, the difficult period for markets occurs in the weeks leading up to it—when no one knows exactly what will happen.

Markets struggle most with uncertainty

Before a conflict begins, investors are trying to price multiple possible outcomes at once. Could the situation spread? Will additional countries become involved? Could it disrupt energy supplies or trade routes? How might governments or central banks respond?

When there are too many possible futures, markets tend to price the most negative scenarios. Investors reduce risk, volatility rises, and markets often sell off while everyone waits for clarity.

Then, once events begin to unfold, something interesting often happens. While the situation may still be serious, the range of unknowns narrows. Investors can begin evaluating more concrete scenarios rather than speculating about every possible outcome.

We’ve seen this pattern several times in recent decades

In 1990, when Iraq invaded Kuwait, markets sold off sharply as oil prices spiked and recession fears grew. But once Operation Desert Storm began in early 1991 and the path forward became clearer, markets stabilized and began recovering.

In 2003, the S&P 500 reached a significant low around the time the Iraq invasion began and then moved higher as uncertainty declined.

More recently, markets fell in the weeks leading up to Russia’s invasion of Ukraine in early 2022 and rebounded shortly after the initial shock. The larger market decline later that year was driven less by the war itself and more by rising inflation and aggressive Federal Reserve rate hikes.

That distinction is important.

Geopolitical events can create short-term volatility, but the broader economic environment often determines how lasting the market impact becomes.

Which brings us to the current situation

There is significant escalation in the Middle East, including coordinated military actions and retaliatory responses across the region. There have also been reports of damage near Dubai’s Jebel Ali Port and rising concerns about potential disruptions to shipping lanes.

From a market perspective, the key issue investors are watching right now is energy.

The Strait of Hormuz is one of the most important energy routes in the world. Roughly 20% of global petroleum consumption moves through that narrow passage each day. If energy flows through that corridor were significantly disrupted, it could create a meaningful global supply shock.

At the moment, markets are reacting to the "risk" of disruption rather than confirmed sustained closures. That distinction matters because the potential for disruption and an actual supply interruption can lead to very different economic outcomes.

If tensions remain contained and energy continues flowing, the historical pattern could still hold: markets experience a spike in volatility, investors adjust their positioning, and conditions gradually stabilize as more information becomes available.

If energy supplies are significantly disrupted, however, the situation would likely have broader economic implications.

A sustained oil shock can push inflation higher, tighten financial conditions, and limit the flexibility of central banks. In that environment, market volatility can persist longer because the issue moves beyond geopolitics and begins affecting the broader economy.

Periods like this remind us that markets often move through a predictable emotional cycle: an initial shock, a surge in alarming headlines, heightened volatility, and eventually a shift toward stabilization as investors adjust to the new environment.

Periods like this remind us that markets often move through a predictable emotional cycle: an initial shock, a surge in alarming headlines, heightened volatility, and eventually a shift toward stabilization as investors adjust to the new environment.

Markets are forward-looking by nature. They tend to begin pricing the next phase of events long before the headlines fully calm down.

For long-term investors (like you and me), the most important response during uncertain times is usually the same as it has always been: stay disciplined, stay diversified, and avoid making major decisions based solely on short-term headlines.

Remember the "Financial News" media is concerned with headlines, not history. They want you to worry, because when you worry, you are more engaged with their content. If they report what I just wrote, you won't worry and thus you won't care much. They can't have that.