- Stock markets have proved remarkably adept at shrugging off wars since 1962
- Investors are nevertheless looking nervously back to oil price shocks of 1973, 1979 and 2022, two of which had their origins in the Middle East
- Those price spikes resulted in inflation, sharp increases in interest rates and trouble for stock markets
- Gold sailed serenely through all three of those crises, but stock markets did not
“Many investors may well be inclined to side with Edwin Starr’s famous song when it comes to the matter of current conflict in the Middle East or at least argue that there are far more important things to worry about right now than mere asset and share prices. Unfortunately, investors can only buy or sell the markets they have, not the markets they want, and prices are starting to gyrate in response to events in and around Iran,” says AJ Bell investment director Russ Mould.
“From the very narrow perspective of portfolios, a study of conflicts involving either the US or the UK since the institution of the UK’s FTSE All-Share in 1962 shows any negative impact upon stock markets tends to be relatively short-lived, although the major outlier did take place in the Middle East, which may explain the heightened market volatility.
“There is clearly a wider, humanitarian context here but a study of conflicts that stretch from Israeli General Moshe Dayan’s pre-emptive Six Days War of 1967 to Russia’s invasion of Ukraine in 2022 suggest that financial markets, for better or for worse, tend to shrug off these terrible events.
“Awful and frightening as all of those events were, American and British share prices tended to show remarkable resilience on most occasions.
Source: LSEG Refinitiv data
“The mild exceptions to the rule are 1968's Russian invasion of Czechoslovakia, as it was then, to bring Alexander Dubček to heel and 2001’s terrorist attacks, but the globe was already in the grip of a bear market then anyway as the tech, media and telecoms bubble began to burst.
“The real outlier is the 1973 Yom Kippur war when Israel fought off a joint attack launched by Egypt and Syria.
“While the long-term effect of the war was a chain of events which led to the 1978 Camp David accords and 1979 peace settlement between Cairo and Jerusalem, the immediate consequence was OPEC’s oil embargo, imposed in anger at America’s support for Israel.
“Oil shot up from $4.50 to $14.50 a barrel and inflation spiked in the West. The nasty recession that followed hammered markets in nominal terms for the next 15 months and inflation hurt returns in real, post-inflation terms for most of the next ten years.
Source: LSEG Refinitiv data
Source: LSEG Refinitiv data
“All asset classes – bar gold – took a pasting between late 1973 and early 1975.
Source: LSEG Refinitiv data
“That was thanks to an oil-fuelled surge in inflation which was, ultimately, only tamed by the hefty interest rate increases sanctioned by Paul Volcker at the US Federal Reserve and Margaret Thatcher and Nigel Lawson in 10 and 11 Downing Street in late 1970s and early 1980s.
Source: LSEG Refinitiv data, Bank of England, Office for National Statistics
“It could also be argued that the conflict which had truly long-term effects was Vietnam, not least because it lasted the longest of any of them. The 20-year war only ended when North Vietnam overran Saigon in 1975 and by then America had suffered dreadful casualties, pounding blows to its reputation as a global superpower and also great damage to its balance sheet.
“One of the reasons behind President Richard M. Nixon’s decision to take America off the gold standard in 1971 was its soaring debt burden, largely incurred owing to its military efforts in South-East Asia.
“The dollar lost around a third of its value across the rest of the decade and gold surged as the shift away from the Bretton Woods mechanism and toward floating currencies was swiftly followed by the oil shock of 1973 (and another in 1979 after the fall of the Shah in Iran), weak growth and uncomfortably high inflation.
“Inflation became a key preoccupation of financial markets after the Russian invasion of Ukraine. Subsequent spikes in oil and gas prices fuelled inflation that had already started to flare, thanks to the ultra-loose monetary and fiscal policies implemented by many central banks and governments in response to Covid-19, policies that helped to stoke demand at a time when supply was somewhat constricted.
“Inflation shot higher and has proved sticky ever since. That forced rapid interest rate rises from central banks and equity markets stumbled in the second half of 2022.
Source: LSEG Refinitiv data
“Anything that jeopardises energy supplies and forces fresh hikes in oil and gas prices are likely to go down as badly with investors now as they would with consumers, owing to memories of the 1973, 1979 and 2022 oil price shocks and the economic damage they did, even if the last-named was pretty mild compared to the first two.
“Even the moves seen so far in 2026 are nowhere near as dramatic as those of 1973, 1979 or 2022, and that is one reason why markets continue to hope for a short conflict in the Middle East, for their own purposes, besides the broader, more important humanitarian ones.
“A brief, successful campaign is presumably the Israeli and American plan, too, although the concept of the ‘short, victorious war’ is a fraught one, as any history student will tell you.
“Russian interior minister Vyacheslav von Plehve argued in favour of aggression against Japan as a means of uniting the country in the face of widespread unrest, only for the 1904-05 Russo-Japanese war to result in a catastrophic defeat which led to the 1905 revolution and greatly weakened the Tsarist regime which finally fell after another crushing loss in World War I and 1918’s Treaty of Brest-Litovsk.
“Any conflict that drags on can have far wider consequences than those originally envisaged, and not just for oil and gas prices, and thus inflation, monetary policy and asset prices.”
