Insights + Resources

Middle East Conflict: How Do Stocks React to Geopolitical Shocks?

Apr 17, 2024

Market Update
Market Update

Following Iran’s missile and drone strikes on Israel over the weekend and the apparent escalation likely in any Israeli response, stocks fell sharply during Monday’s trading session. We examine the latest developments in the Middle East conflict, how stocks have reacted historically to geopolitical events, and the possible impact on markets moving forward.

Immediate Stock Market Response to Escalation in Middle East Conflict

The unprecedented direct retaliatory attack on Israel by Iran, not an assault by one of Iran’s military surrogates, clearly marked an escalation in the region that has been on a knife-edge since the October 7 attacks by Hamas on Israeli settlements. The onslaught of Iran’s military firepower this past weekend did prove that Israel was capable of circumventing the effect of the missiles, with the Israeli defense being aided by the U.S., U.K., and Jordan, along with other Middle Eastern countries. As a result of this combined response, the attacks were heavily thwarted with no reported casualties, while Iranian officials said they considered the matter “resolved” unless Israel retaliates. This may have helped calm markets, with stocks actually opening higher on Monday amid optimism that tensions may be contained. This early optimism was short-lived, however, and after reports the Israeli war cabinet declared to retaliate “clearly and forcefully” stocks tumbled to a 1.2% loss on the day.

Stock Market Performance Following Prior Geopolitical Events

This day-one loss of about 1% is very close to the average market reaction to historical geopolitical crisis events, including wars and terrorist attacks. Analyzing the two dozen or so such events going back to World War II in the table below, the average one-day return at the onset of the geopolitical event is -1.1%.

While the total drawdown recovery timetable is unknown, and likely highly dependent on the scale of escalation, prior geopolitical events have led to total average drawdowns of only -4.7%. The average time to reach a market bottom is 19 days, and the average time to fully recover losses is 42 days (with the onset of the Israel-Hamas war hitting both these milestones in slightly shorter order). We believe these relatively minimal drawdowns and quick recoveries show that stock markets have historically held up well during geopolitical shocks, including wars and other military conflicts going back decades.

Stocks Largely Take Geopolitical Events In Stride

S&P 500 Index And Select Geopolitical Events

    S&P 500 Returns Days
Market Shock Events Event Date One Day Total Drawdown Bottom Recovery
Pearl Harbor Attack 12/7/1941 (3.8%) (19.8%) 143 307
N. Korean Invades S. Korea 6/25/1950 (5.4%) (12.9%) 23 82
Hungarian Uprising 10/23/1956 (0.2%) (0.8%) 3 4
Suez Crisis 10/29/1956 0.3% (1.5%) 3 4
Cuban Missile Crisis 10/16/1962 (0.3%) (6.6%) 8 18
Kennedy Assassination 11/22/1963 (2.8%) (2.8%) 1 1
Gulf of Tonkin Incident 8/2/1964 (0.2%) (2.2%) 25 41
Six-Day War 6/5/1967 (1.5%) (1.5%) 1 2
Tet Offensive 1/30/1968 (0.5%) (6.0%) 36 65
Munich Olympics 9/5/1972 (0.3%) (4.3%) 42 57
Yom Kippur War 10/6/1973 0.3% (0.6%) 5 6
Reagan Shooting 3/30/1981 (0.3%) (0.3%) 1 2
Iraq’s Invasion of Kuwait 8/2/1990 (1.1%) (16.9%) 71 189
U.S. Terrorist Attacks 9/11/2001 (4.9%) (11.6%) 11 31
Madrid Bombing 3/11/2004 (1.5%) (2.9%) 14 20
London Subway Bombing 7/5/2005 0.9% 0.0% 1 4
Boston Marathon Bombing 4/15/2013 (2.3%) (3.0%) 4 15
Bombing of Syria 4/7/2017 (0.1%) (1.2%) 7 18
North Korea Missile Crisis 7/28/2017 (0.1%) (1.5%) 14 36
Saudi Aramco Drone Strike 9/14/2019 (0.3%) (4.0%) 19 41
Iranian General Killed In Airstrike 1/3/2020 (0.7%) (0.7%) 1 5
U.S. Pulls Out of Afghanistan 8/30/2021 0.4% (0.1%) 1 3
Escalation of Russia/Ukraine Conflict 2/17/2022 (2.1%) (6.8%) 13 23
Israel-Hamas War 10/9/2023 0.3% (4.5%) 14 19
Iran Drone/Missile Attacks on Israel 4/14/2023 (1.2%) ? ? ?
Average   (1.1%) (4.7%) 19.2 41.4

Source: LPL Research, Bloomberg, Factset, S&P Dow Jones Indexes, CFRA, Strategas 4/15/24
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.

When we consider a slightly wider list of events that also includes major non-war-related historical events and how stocks performed over the next year after the event, it seems the main determinant of returns is not the severity of the event but whether the event coincided with or caused a recession. Assuming no imminent recession, which is LPL Research’s base-case scenario, history shows that markets are roughly flat over the next month following an event, but on average fully recover in the following three, six, and 12-month periods. In the case of an event near a recession, however, stocks are down on average over all the time periods studied (one, three, six, and 12 months).

How Do Stocks Do After Major Events?

S&P 500 Index Performance After Select Major Geopolitical And Historical Events

    S&P 500 Returns  
Market Shock Events Event Date One Month Three Months Six Months 12 Months  

Near a Recession?


Germany Invades France 5/10/1940 (19.9%) (12.7%) (4.5%) (18.7%) No
Pearl Harbor Attack 12/7/1941 (1.0%) (11.0%) (6.5%) 4.3% No
N. Korean Invades S. Korea 6/25/1950 (10.0%) 1.6% 4.1% 11.7% No
Hungarian Uprising 10/23/1956 (2.1%) (2.8%) (1.3%) (11.7%) Yes
Suez Crisis 10/29/1956 (4.4%) (3.6%) (0.0%) (11.6%) Yes
Cuban Missile Crisis 10/16/1962 5.1% 14.1% 20.7% 27.8% No
Kennedy Assassination 11/22/1963 6.8% 11.9% 15.5% 23.2% No
Gulf of Tonkin Incident 8/2/1964 (1.6%) 1.9% 5.3% 2.7% No
Six-Day War 6/5/1967 3.3% 5.9% 7.5% 13.5% No
Tet Offensive 1/30/1968 (3.8%) 5.1% 5.2% 10.2% No
Penn Central Bankruptcy 6/21/1970 (0.1%) 7.2% 16.8% 28.6% Yes
Munich Olympics 9/5/1972 (1.0%) 5.7% 2.3% (5.8%) No
Yom Kippur War 10/6/1973 (3.9%) (10.7%) (15.3%) (43.2%) Yes
Oil Embargo 10/16/1973 (7.0%) (13.2%) (14.4%) (35.2%) Yes
Nixon Resigns 8/9/1974 (14.4%) (7.0%) (2.8%) 6.4% Yes
Reagan Shooting 3/30/1981 (0.9%) (1.8%) (14.0%) (16.4%) Yes
Continental Illinois Bailout 5/9/1984 (3.1%) 1.0% 6.4% 12.8% No
1987 Stock Market Crash 10/19/1987 8.1% 10.9% 14.7% 22.9% No
Iraq’s Invasion of Kuwait 8/2/1990 (8.2%) (13.5%) (2.1%) 10.1% Yes
Soros Breaks Bank of England 9/16/1992 (2.5%) 3.0% 6.8% 9.9% No
First World Trade Center Bombing 2/26/1993 1.7% 2.0% 4.0% 4.7% No
Asian Financial Crisis 10/8/1997 (3.7%) (1.8%) 14.1% (1.5%) No
U.S.S. Cole Yemen Bombing 10/12/2000 2.7% (0.9%) (11.3%) (19.6%) Yes
U.S. Terrorist Attacks 9/11/2001 (0.2%) 2.5% 6.7% (18.4%) Yes
Iraq War Started 3/20/2003 1.9% 13.6% 18.7% 26.7% No
Madrid Bombing 3/11/2004 3.5% 2.7% 1.5% 8.4% No
London Subway Bombing 7/5/2005 3.3% 1.8% 5.3% 5.5% No
Bear Stearns Collapses 3/14/2008 3.6% 5.6% (2.8%) (41.5%) Yes
Lehman Brothers Collapses 9/15/2008 (16.3%) (26.2%) (34.8%) (11.7%) Yes
Boston Marathon Bombing 4/15/2013 6.3% 8.4% 9.7% 17.9% No
Russia Annexed Crimea 2/20/2014 1.5% 2.6% 8.0% 14.7% No
BREXIT 6/24/2016 6.5% 6.2% 11.0% 19.7% No
Bombing of Syria 4/7/2017 1.8% 3.1% 7.6% 12.8% No
North Korea Missile Crisis 7/28/2017 (1.1%) 3.6% 14.8% 13.4% No
Saudi Aramco Drone Strike 9/14/2019 (1.4%) 5.4% (8.8%) 12.5% No
Iranian General Killed In Airstrike 1/3/2020 1.9% (23.1%) (4.2%) 14.4% Yes
U.S. Pulls Out of Afghanistan 8/30/2021 (3.7%) 2.8% (3.4%) (12.0%) No
Escalation of Russia/Ukraine Conflict 2/17/2022 1.8% (10.9%) (2.2%) (6.9%) No
Israel-Hamas War 10/7/2023 1.6% 9.0% 20.8% ? ?
Iran Drone/Missile Attacks on Israel 4/14/2024 ? ? ? ? ?
  Average (1.3%) (0.0%) 2.5% 2.1%  
  Average if no recession (0.1%) 3.1% 6.3% 9.2%  
  Average if recession (3.8%) (6.7%) (6.1%) (11.5%)  

Source: LPL Research, Bloomberg, Factset, S&P Dow Jones Indexes, CFRA, Strategas 4/15/24
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.

Impact on Interest Rates and Inflation

The initial hope for a calming, then turn towards an increasing of tensions following the Iranian drone and missile attacks had the opposite immediate effect on bond yields as they did on stocks. Early in the session, Treasuries were witnessing a continuation of the hawkish repricing of Federal Reserve (Fed) rate cut expectations, with yields on the 10-year spiking from 4.52% to 4.66%. However, following reports of the potential Israeli retaliatory response, there was a flight to safety and the benchmark rate fell back to 4.61%, still meaningfully higher on the day. If geopolitical events escalate and become a drag on growth, it could steer the Fed toward an acceleration in the rate-cutting cycle. Currently, markets appear to be worried about the inflationary effects of a spike in oil prices. If oil prices remain elevated, contributing to an uptick in inflation, this could push the Fed into a higher-for-longer scenario for interest rates. A major risk-off move in market sentiment, however, would drive safe haven demand and likely push Treasury yields lower.

Impact on Oil and the Energy Sector

Coming into the weekend, crude oil traders appeared to have priced in some of the risk of the expected attack, with oil seeing an intra-day spike on Friday to its highest level since October 2023. After the Iranian attack proved less damaging than anticipated, prices dipped on Monday morning before also surging following reports of intended Israeli retaliation. There will undoubtedly be an increased risk premium embedded in oil prices going forward, as markets assess the likely impact on supply. This should continue to support the energy sector in which LPL Research maintains its overweight tactical recommendation.

Impact on Gold and Precious Metals

Gold prices followed a similar pattern to oil, with a spike on Friday, then a fall on Monday morning before ending higher (0.92%) amid the afternoon flight to safety. We recently upgraded our view on the precious metals group to positive from neutral, based on strong technical indicators, with gold also supported by the potential for rate cuts, higher inflation, and robust central bank demand. Further Middle East escalation would add further support, likely pushing gold to new all-time highs.

Impact on Equity Positioning

The potential impact on the broader equity markets is difficult to assess at this stage because we don’t know the scale of the Israeli response or how Iran will in turn react to that escalation (though Tehran has already suggested more “decisive” strikes would follow any Israeli counterattack). This uncertainty has already pushed stock market volatility higher, with the volatility index, or VIX for short, ending Monday at its highest close (19.23) since the end of October 2023. Further escalation would likely send stocks lower, and perhaps shift market leadership more toward defensives (utilities, gold, Treasuries, etc.). To be clear, this is not our base case at present but an outcome we are prepared for nonetheless. We recently reduced risk in our Tactical Asset Allocation, Strategic Asset Allocation, and most of our model portfolios.

Defense stocks could also find support, as they did after the initial Hamas attacks on Israel, as defense spending may increase if Congress bolsters supplies of munitions and air defense systems to Israel (as well as continuing to supply Ukraine).

The Strategic and Tactical Asset Allocation Committee (STAAC) maintains its neutral tactical stance on equities but will continue to watch developments in the Middle East closely to determine the potential impact on the energy sector, broader equity markets, and the path of interest rates.




This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

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