Why wars rarely derail share markets long term

War shocks markets short term, but history tells a calmer story.

The war in the Middle East has dominated headlines since late February, when US and Israeli strikes on Iran triggered a conflict now into its seventh week.

The Strait of Hormuz has been closed, global oil supplies disrupted, and inflation is running high.

For many investors, the instinct is to sell. This instinct is almost always the wrong one.

Despite the severity of the conflict, the S&P 500 has just closed at a record high.

That is not an anomaly. It is how share markets have typically behaved through major geopolitical events for decades.

The historical pattern

History shows that after major geopolitical shocks, share markets are normally higher 12 months later, and in most cases go on to new highs.

In fact, in 19 of the past 20 geopolitical events since the end of WWII, the S&P 500 has been higher 12 months after the conflict began.

These events include the Korean War, the Cuban Missile Crisis, the Yom Kippur War, 9/11, the Iraq War and Russia's invasion of Ukraine.

Each one felt, at the time, like a reason to get out of the market. In every case, investors who stayed put were better off a year later.

The mechanics are straightforward. The worst of the fall typically happens in the first four to six weeks. After that, the worst-case scenario is already reflected in prices.

Unless an event materially changes the long-term economic outlook, and very few do, share prices begin to recover.

A decline of 10% or more tends to occur every 18 to 24 months. This is simply the volatility investors must accept when they invest in shares.

Recovery from these declines is the rule, not the exception.

Selling out of the market during a conflict requires being right twice, once on the way out and once on the way back in.

As Baron Rothschild famously put it, "Buy to the sound of the cannons, sell to the sound of trumpets."

This is far harder than it sounds. It means selling when things feel fine and buying when panic is at its peak.

Most investors manage the first. Very few manage the second.

A decline in portfolio value has roughly twice the emotional impact of an equivalent gain. That is why so many investors freeze at exactly the wrong moment.

The cost of freezing is significant.

An investor who stayed fully invested in the S&P 500 from 1995 to 2025 earned around 10.3% a year, according to Invesco.

An investor who missed just the 10 best trading days over that period earned a much lower 7.4% a year.

Those best days tend to cluster during periods of fear, which are the very moments investors feel most tempted to sell.

We saw this clearly during COVID-19.

After the initial lockdowns in March 2020, no-one could have predicted the share market would rise by 37% over the following 12 months.

Those who panicked and moved to cash missed the recovery.

Later research showed more than half of super fund members who switched investment options during this period would have been better off doing nothing at all.

What actually drives returns

Short-term price movements are driven by headlines. Long-term returns are driven by economics.

Over the next few years, the numbers that matter are unemployment, GDP growth, corporate earnings and inflation.

These determine whether businesses can grow profits, whether consumers can keep spending, and whether central banks raise or cut interest rates.

Wars and geopolitical events rarely change the long-term direction of the share market.

The takeaway

Any investment in shares should be made with a minimum three-year view, and ideally five to 10 years.

On that timeframe, the current conflict, like every conflict before it, is very unlikely to matter for returns.

Wars are devastating for humanity, but share markets are forward-looking and work through shocks far faster than most investors expect.

The S&P 500 reaching record highs during the conflict is not callousness. It reflects the collective judgement that earnings will still be growing 12 months from now.

The most effective response is usually the dullest one.

Keep a long-term view, stay invested and let fundamentals do the work. Time in the market beats timing the market.

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