Over the long run, Wall Street is, arguably, the world’s greatest wealth creator. The benchmark S&P 500 (SNPINDEX: ^GSPC) has never declined over any rolling 20-year period, while the Dow Jones Industrial Average (DJINDICES: ^DJI) and Nasdaq Composite (NASDAQINDEX: ^IXIC) have often rallied in lockstep with the S&P 500 to record-closing highs.
However, short-term directional moves in equities are far less certain — especially when major geopolitical events are introduced into the equation.
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On Feb. 28, U.S. and Israeli forces commenced military operations against Iran, which has clearly roiled equity markets. The question on investors’ minds is: Will the Iran war lead to a stock market crash?
While nothing can be said with concrete certainty, nine decades of history provide invaluable insight.
Over the previous nine decades, there has been no shortage of major geopolitical events, including wars, terrorist attacks, assassination attempts on world leaders, invasions, and financial crises. While many of these events resulted in emotion-driven trading and heightened short-term volatility, a stock market crash was uncommon.
But among these dozens of major geopolitical events, the one variable that has increased the probability of a stock market crash is oil. When global energy supply is disrupted or at risk of being constrained by a geopolitical event, we’ve been more likely to see a significant short-term swoon in stocks or even a brief stock market crash.
For example, in the three weeks following Iraq’s invasion of Kuwait in August 1990, the S&P 500 shed 13% of its value. In October 1973, when the Arab members of OPEC banned oil exports to select nations supporting Israel (the U.S. included), the S&P 500 lost 17% of its value in under two months, and plummeted by roughly 44% over 11.5 months.
When the supply of oil is constrained, its spot price can soar. In the wake of the Iran war commencing and the Strait of Hormuz closing to most oil exports, the spot price for West Texas Intermediate crude skyrocketed by 36% this week. Aside from increasing prices at the pump, higher oil prices are known to adversely affect hiring and compress margins across a variety of industries.
