CIO Insights: Navigating Dire Straits

10 minute read

In the weeks following the US and Israeli strikes on Iran, markets are still assessing how far the war in the Middle East could escalate, how long it could last, and what that might mean for energy prices, inflation, and global growth. The reality is that geopolitical events are inherently unpredictable. Military developments, diplomatic responses, and political decisions can shift quickly, making outcomes difficult to forecast. But while we cannot predict how a conflict will unfold, history can still provide useful context.

In this month’s CIO Insights, we look at how markets have responded to past conflicts and what those lessons could mean for today.

Key takeaways

• History tells us that market shocks from war are usually sharp and short, unless any resulting energy disruption becomes structural. Across past geopolitical events, markets have typically sold off quickly as uncertainty spikes. The bottom often occurred once investors gained clarity on the economic impact – particularly through commodity disruptions – rather than when the conflict itself ended. Markets have typically taken about 30 trading days to recover from the initial shock of geopolitical conflicts. The exception was in the 1970s, when oil supply disruptions were both large and persistent. Combined with broader macro conditions, those disruptions amplified the shock into stagflation.
• For this conflict, the key question is whether the energy shock proves temporary or sustained. Historically, markets have stabilised once investors believe the commodity shock has a ceiling – when oil prices stop accelerating and evidence emerges that supply disruptions are manageable. Past episodes also suggest that if oil prices do not remain elevated for more than a few quarters, economies tend to absorb the shock before stagflation takes hold. For the current situation in the Strait of Hormuz, key signals to watch include tanker traffic resuming or energy demand beginning to adjust. Today’s macro backdrop also lowers the likelihood of a 1970s-style stagflation outcome: economies are less energy-intensive, the US is less reliant on Middle Eastern oil, and central banks have stronger inflation-fighting credibility.
• Staying invested in a diversified portfolio has historically been more effective than trying to time geopolitical shocks. While wars often trigger short-term volatility, markets typically recover once uncertainty fades. Across a dozen conflicts since World War II, the US equity market delivered around 10% average returns in the year following the shock for those who stayed invested. These episodes also tend to produce temporary rotations across assets, but those shifts are difficult to identify in real time. As a result, keeping a diversified portfolio and staying disciplined through the dips has generally proven more resilient than reacting to each geopolitical headline.

(See our Glossary at the end for a breakdown of the terms used in this article.)

History shows markets tend to stabilise once the economic impact becomes clear

Market shocks from geopolitical conflict are usually sharp but short-lived. Across the 12 conflicts highlighted in Table 1, the S&P 500 fell about 9% on average, with markets reaching a trough in roughly 36 trading days. When excluding the 1970s oil shock, the average decline was closer to 6%, with markets bottoming in about 16 trading days.

Once uncertainty around the economic impact began to ease, recoveries were often swift. Outside of the 1970s, the full cycle from sell-off to recovery averaged about 32 trading days. In other words, markets tend to process war-related risk relatively quickly.

The takeaway is that markets rarely wait for wars to end before stabilising. Instead, turning points usually occur once investors gain clarity on the broader economic consequences of the conflict – in particular, the trajectory of energy prices. Markets tend to bottom when it becomes clear that supply disruptions will be manageable, escalation is limited or geographically contained, demand adjusts, or policy responses are likely to cushion the shock. Formal declarations of victory typically arrive too late to matter for asset prices.

Several historical episodes illustrate this pattern:

• Gulf War (1990-91): Oil prices doubled after Iraq’s invasion of Kuwait temporarily disrupted about 5-6% of global supply, and the S&P 500 fell about 16%. Yet equities bottomed months before the war ended, once it became clear that Saudi spare capacity and coalition intervention would restore supply.
• Iraq War (2003): Oil initially rose on fears of disruption, but after the conflict began and Iraqi infrastructure remained largely intact, supply risks appeared manageable. Oil prices declined and equities bottomed around the start of the invasion, as the feared supply shock failed to materialize, even though the war continued for years.
• Russia-Ukraine War (2022): European gas and global oil prices surged following the invasion, but markets stabilised once it became clear that Europe could replace Russian gas via LNG imports, demand was adjusting, and storage levels were adequate. Gas prices peaked in August 2022 while global equities bottomed two months later.

The main exception, however, were the 1970s oil shocks. Supply disruptions lasted for years, and higher energy prices fed into wages and broader inflation. All the while, central banks struggled to contain it. The result was stagflation, or weak growth combined with persistently high inflation. This illustrates the main risk: conflict becomes economically destabilising when energy disruptions are both large and persistent.

The market outlook today hinges on whether the energy shock persists

The key question for this conflict is whether the energy shock will prove temporary or sustained. The main risk revolves around disruption to flows through the Strait of Hormuz, a critical channel for global energy trade through which 20 million barrels of oil – or one-fifth of the world’s oil supply – flows each day.

As Chart 1 shows, traffic through the Strait has ground to a halt. Total tanker crossings have plunged to just four as of the week ending 13 March from an average 390 per week over the previous 12 months.

If the disruption proves short-lived – for example, if tanker traffic resumes or strategic reserves offset supply losses – markets could stabilise even if geopolitical tensions remain elevated. The turning point will likely come once investors see clear evidence that the energy shock is contained rather than escalating. If the disruption persists, oil prices should continue to climb and materially increase the risk of a stagflationary shock.

As illustrated in Chart 2, Bloomberg Economics estimates Brent crude could rise to around $105 per barrel if the Strait of Hormuz remains closed for a month.¹ (Prices are already near $100 at the time of writing after more than two weeks of disruption.) A three-month disruption could see prices peak around $160. 

The macro impact could follow quickly: they estimate oil near $110 could trim 0.1 percentage point from GDP and lift inflation by 0.7 percentage point in the US, and those effects could double as oil approaches $170.

Why the duration of the oil shock matters

A sharp spike in oil prices should eventually trigger demand destruction, reserve releases, or enough economic and political pressure to force an end to the disruption. Until those adjustments occur, however, duration becomes the key risk. The longer a supply shock persists, the more likely higher energy costs spread through the broader economy – becoming embedded in wages, prices, and inflation expectations.

Research suggests the pass-through from energy prices into wages and core inflation occurs over several quarters, meaning short-lived oil spikes tend to lift inflation only temporarily.² Conversely, persistent shocks are more likely to feed into broader inflation – and, in extreme cases, contribute to stagflation.

Oil spikes that reversed within several months – including during the 1990 Gulf War and Russia’s invasion of Ukraine in 2022 – pushed headline inflation higher temporarily but did not trigger sustained second-round effects. By contrast, the oil shocks of the 1970s kept energy prices elevated for years, allowing higher input costs to feed into wages and inflation expectations and ultimately producing stagflation.

How today’s economy differs from the 1970s

Today, however, the backdrop differs in a few important ways:

• The energy market is more resilient than it was in the 1970s. At the time, advanced economies were heavily dependent on imported oil, spare capacity was limited, and there were no coordinated emergency reserves – prompting the creation of the International Energy Agency (IEA) in 1974 and the US Strategic Petroleum Reserve (SPR) in 1975 after the first oil crisis. Today, supply is more diversified – including the US as the world’s largest producer – and strategic reserves across IEA members provide around 90 days of import cover.
• Research suggests today’s macroeconomic environment is more resilient to energy shocks than it was in the 1970s.³ Oil accounted for a much larger share of economic activity then, labour markets featured widespread wage indexation (where wages automatically rise with inflation), and central banks were slower to tighten policy as inflation rose. That allowed the initial energy shock to spread through wages and costs across the economy. Today, economies are far less energy-intensive, wage indexation is rare, and central banks operate under credible inflation-targeting regimes.

To be sure, these buffers do not eliminate the risk from a prolonged disruption. If supply losses persist long enough to keep oil prices elevated for several quarters, higher energy costs can still spread through the economy – raising production costs, lifting inflation expectations, and weighing on growth.

The signals to watch moving forward

For investors, the first signs that markets are stabilising typically appear in energy markets, safe-haven assets, and volatility. Historically, geopolitical selloffs have tended to bottom once there are signs that supply disruptions are manageable, oil prices stop accelerating, safe-haven flows begin to ease, and market volatility starts to decline. In other words, markets usually stabilise once investors gain confidence that the commodity shock is no longer worsening,  rather than waiting for a definitive outcome of the war.

Monitoring how these indicators evolve can help investors gauge when the economic impact of the conflict is becoming clearer. For now, the signals remain mixed, as shown below in Table 2.

Oil prices remain elevated and sensitive to developments around the Strait of Hormuz, where tanker traffic is at a standstill. In financial markets, equity volatility and credit spreads have risen, but remain well below levels typically associated with systemic stress. Taken together, this suggests markets are pricing the risk of a prolonged energy disruption, but not yet a full-blown macro shock.

Discipline and diversification matter more than timing geopolitical developments

For investors, the practical implication is that geopolitical shocks tend to produce short-term volatility, but the longer-term market impact is often more contained once uncertainty fades. Staying invested in a diversified portfolio – rather than attempting to trade each headline – has generally proven more resilient during periods of geopolitical uncertainty. 

As Chart 3 shows, across the conflicts highlighted at the top of this note, the US equity market delivered average returns of about 10% after 12 months for investors who stuck through the initial shock.

The main exceptions were conflicts that coincided with broader macro disruptions. In the 1970s, the oil shocks interacted with already fragile macro conditions and policy missteps, amplifying the shock into stagflation. The war in Afghanistan in 2001 overlapped with the dot-com downturn, while the Russia-Ukraine war in 2022 occurred during a global inflation surge that forced central banks to tighten policy aggressively.

In other words, unless a larger macro shock is at play, markets have typically recovered once the initial uncertainty fades, making panic selling during geopolitical drawdowns costly for investors.

Across markets more broadly, however, these shocks tend to trigger short-term rotations rather than lasting trends. Commodity prices – especially oil – often move first as investors price in supply disruptions. Safe havens such as gold and the US dollar typically follow. Equity markets typically adjust later as investors reassess the economic impact, while bond reactions depend on whether the shock primarily threatens growth or inflation.

These rotations are difficult to identify in real time, however, as geopolitical conflicts are inherently uncertain and can evolve quickly. Rather than trying to predict how conflicts will unfold, our focus is on how portfolios are positioned – ensuring risks are managed and allocations remain resilient across a range of outcomes.

Our General Investing portfolios powered by StashAway, for example, are built on diversification across regions, asset classes, and sectors. They include exposure to assets that have historically been more resilient during geopolitical stress – such as gold – as well as sectors like energy, industrials, and defense, alongside broad equity and fixed-income allocations. As always, the key is to stay disciplined and stay invested. Investment decisions should be anchored in the long-term fundamentals, not the short-term headlines.

Authors

Stephanie Leung, Chief Investment Officer

Stephanie and her team oversee the full spectrum of investment products and portfolios offered at StashAway. She brings more than two decades of investment expertise across multiple asset classes. Prior to joining StashAway in 2020, she managed investment portfolios at institutions such as Goldman Sachs and multi-billion dollar family offices in the region.

Justin Jimenez, Head of Macro and Investment Research

Justin has more than a decade of experience in economic and investment research, and contributes to shaping the investment office's views on the global economy and asset classes. Prior to joining StashAway in 2022, he was an economist at Bloomberg.

Glossary

Headline inflation

The broadest measure of inflation, covering all goods and services.

Core inflation

A measure of inflation that excludes food and energy prices, which tend to swing more sharply.

Stagflation

A macroeconomic environment where growth slows or stalls while inflation remains elevated.

Brent crude

A global benchmark for oil prices, based on futures contracts traded on the Intercontinental Exchange (ICE).

Demand destruction

When the price of a commodity rises to a level where consumers and businesses reduce usage by switching to alternatives or cutting back.

Second-round effects

When an initial price increase in one area, like energy, feeds into wages, production costs, and prices elsewhere in the economy.

References

1. Daoud, Z. and Sakthivel, B. (2026). Hormuz Closed for Months? Modeling Oil Hit. Bloomberg Economics.
2. Alp, H., Klepacz, M., & Saxena, A. (2023). Second-round effects of oil prices on inflation in advanced foreign economies. Federal Reserve Board FEDS Notes. https://www.federalreserve.gov/econres/notes/feds-notes/second-round-effects-of-oil-prices-on-inflation-in-the-advanced-foreign-economies-20231215.html 
3. Blanchard, O. J., and Galí, J. (2007). The Macroeconomic Effects of Oil Price Shocks: Why Are the 2000s So Different from the 1970s? NBER Working Paper No. 13368. National Bureau of Economic Research. Retrieved from: https://www.nber.org/system/files/working_papers/w13368/w13368.pdf