A Short History of War & Markets
And why the fear is almost always overblown
Every war produces two casualties: the people in its path, and the investment thesis of whoever panicked and sold.
The Iran war is three weeks old. The headlines are doing what war headlines always do — cycling through fear, escalation, worst-case scenarios, and the familiar chorus of financial commentators explaining why this time is different and why you should be worried about your portfolio.
They are almost certainly wrong. Not about the human tragedy, but rather about the actual market impact.
History has something specific to say about this.
And history, for once, is unusually clear.
The Harsh Reality of War & Market Returns
When I was working at Fisher Investments, I came across research that reframed how I think about geopolitical risk entirely. The core finding was simple, repeatable, and deeply counterintuitive:
Wars cause immediate fear. But they rarely cause lasting market damage.
The pattern held across every major conflict studied: an initial selloff driven by uncertainty, followed by a recovery that in most cases left investors who held significantly better off than those who fled. The 12-month return after a war’s onset was, on average, positive — often strongly so.
I’ve been thinking about that research since the first airstrike. So let’s go through it, war by war.
World War I (1914–1918)
Immediate reaction: The worst. When war broke out in the summer of 1914, the Dow fell roughly 30% and the New York Stock Exchange closed entirely — for six months. It was the longest market closure in American history. The decision was made to shut the market because liquidity had evaporated and the system was at risk of seizing up.
What happened next: When the exchange reopened, the Dow rose more than 88% in 1915 alone — still the highest single-year return ever recorded for the Dow Jones Industrial Average. From the start of the war in 1914 to its end in 1918, the Dow was up more than 43% in total, or approximately 8.7% annually.
The lesson: The most catastrophic-seeming moment — markets closed, war engulfing Europe — produced the best single-year return in market history when the dust cleared. The investors who held through the closure and the fear came out dramatically ahead.
World War II (1939–1945)
Immediate reaction: Counterintuitive from the very first day. When Hitler invaded Poland on September 1, 1939 — the event that started the war — the Dow shot up nearly 10% the following day. The market, apparently, had been pricing in uncertainty. The certainty of war, as horrible as it was, removed ambiguity.
When Japan attacked Pearl Harbor on December 7, 1941 — pulling the United States directly into the conflict — the Dow fell 2.9% when markets opened Monday. It recovered those losses entirely within a month.
When Allied forces stormed the beaches at Normandy on D-Day, June 6, 1944 — arguably the most dramatic single day of the 20th century — the Dow rose 5% over the following month. The market barely noticed.
What happened next: From the start of WWII in 1939 to its end in 1945, the Dow was up 50% in total — roughly 7% per year. Small-cap stocks did even better, surging more than 30% during the war years.
The lesson: The worst war in human history — 70 to 85 million dead, industrial-scale destruction across two continents — produced a 50% gain for investors who held US equities throughout. The market proved indifferent to the narrative of structural collapse. Which is wild, if you consider how incredibly existential this particular conflict was for the West.
The Korean War (1950–1953)
Immediate reaction: North Korea invaded South Korea in June 1950. This was not a distant European conflict — it involved direct engagement of US forces within weeks. The market dipped sharply on the news.
What happened next: From the start of the Korean War to its end in 1953, the Dow was up approximately 60% in total — an annualized return of around 16%. It remains one of the strongest periods of US equity market performance in the 20th century.
The lesson: A hot war involving direct US military engagement, on the other side of the world, in the early years of the Cold War, with the Soviet nuclear threat looming — and the market compounded at 16% annually. The fear was real. But it turns out the impairment markets feared just didn’t materialize.
Vietnam (1965–1975)
Immediate reaction: The escalation of US involvement in Vietnam in 1965 coincided with a period of strong market performance. Unlike the clean narrative of “war starts, market reacts,” Vietnam was a slow escalation — which made it harder to pinpoint a single shock moment.
What happened next: US equity markets performed well through the early Vietnam years. The more significant market disruption came not from the war itself but from the coincident economic events of the late 1960s and 1970s: the breakdown of Bretton Woods, the 1973 oil embargo, and the inflation surge that followed. Vietnam, on its own, did not break the market.
The lesson: Extended, grinding conflicts without a clear shock moment tend to be absorbed by markets gradually. The real damage from the Vietnam era came from the macro policy failures that accompanied it — not the war itself.
The Gulf War (1990–1991)
Immediate reaction: The sharpest peacetime-era wartime selloff in the modern period. When Iraq invaded Kuwait on August 2, 1990, oil prices spiked, recession fears mounted, and the Dow dropped roughly 21% by October. This is the cleanest example of a war-related market decline in the post-WWII era. Also, perhaps, the most analogous to what’s happening in Iran right now.
What happened next: Operation Desert Storm launched in January 1991. The ground campaign lasted 100 hours. The market’s response to the swift, decisive victory was explosive: the S&P 500 gained nearly 29% in the year following the war’s end — one of the strongest post-conflict bounces on record.
The lesson: Even the worst modern wartime selloff — a 21% drawdown — was followed by a 29% recovery within a year. The investors who sold in October 1990 locked in a 21% loss and missed the subsequent rally. The investors who held recovered and then some.
Notably: the Gulf War decline was driven as much by the oil shock and recession fears as by the war itself. Which is perhaps the most analagous to what’s happening today with Iran, although the major difference between the two conflicts is the Strait of Hormuz (Iraq didn’t have the ability to unilaterally hurt global oil supply).
Iraq War 2.0 (2003–2011)
Immediate reaction: Positive. Markets had been falling for months in anticipation of the invasion — pricing in uncertainty. When the actual invasion launched on March 19, 2003, the Dow rose 2.3% the next day. Certainty, even the certainty of war, resolved the ambiguity premium.
What happened next: The S&P 500 gained 26.7% in the first 12 months of the conflict. From the pre-invasion low to year-end 2003, the Dow was up more than 30%.
The lesson: “Buy the uncertainty, sell once the news is certain” — except the news was a war. Markets care less about the headlines than about whether earnings, inflation, rates, and recession risk are being affected. In 2003, they weren’t.
Russia-Ukraine (2022)
Immediate reaction: The S&P gained 3.27% in the first week after Russia invaded Ukraine on February 24, 2022.
What happened next: The S&P was down 6.05% one year later.
But here’s the critical nuance: The 2022 market decline was driven by the Federal Reserve’s most aggressive rate-hiking cycle in 40 years — not by the war. The war contributed to inflation through energy and commodity channels, but the market damage was a Fed story, not a war story. Attribution matters.
That being said, one could argue that the war served as a catalyst to exacerbate already existing trends (like inflation) and caused serious disruption that we are still feeling today. This is also an ongoing conflict, so it’s hard to see the ultimate outcome (yet).
The Pattern, Distilled
Across more than a century of major conflicts, the data points to the same conclusion:
The immediate reaction is fear. The 12-month outcome is usually positive.
According to Stock Trader’s Almanac analysis of geopolitical crises, the average S&P 500 return 12 months after a new conflict begins is approximately +2.92%. That’s not spectacular, but it’s positive. And decisively not the apocalyptic outcome you will usually hear about.
The exceptions are instructive:
The 1973 Arab oil embargo produced a 34% loss over the following year — but that loss was driven by a sustained energy shock combined with a monetary system in transition and a Fed running behind the curve.
WWI closed the markets for six months — but investors who held through the closure earned 88% in the first year of reopening.
The rule is resilience. The exception is when a war reshapes the macro backdrop — primarily through sustained oil shocks or monetary regime change. The war itself is rarely the mechanism of lasting damage.
The present situation in Iran does have the potential for an exception. We’ll explore that more below.
Why Does This Keep Happening?
This is the question worth spending real time on. The pattern is clear enough — but patterns without mechanisms are just numerology. There are at least five distinct reasons this dynamic repeats, and they compound on each other.
What follows is a deep dive into the psychology behind wartime selloffs and fear, and why this time might be different.
