Why Wall Street’s Ho-Hum Reaction to Iran? Déjà Vu

Stock investors have a good reason to shrug off the threat of war with Iran: Historically, armed conflicts haven’t led to punishing market downdrafts that lasted a long time.

Tuesday’s mild 0.28% loss in the S&P 500 marked the second time in three sessions that stocks went down. Any military escalation “may be unlikely to have a material impact on US economic fundamentals or corporate profits,” said John Lynch, chief investment strategist at LPL Financial.

According to LPL’s research, the Dow Jones Industrial Average has fallen an average of only 2% during 16 major geopolitical events, including the Gulf War, Iraq War, and 9/11. Over the following three and six months, the Dow rose 88% of the time, with average increases of 5% and 7.9%, respectively.

The broader-market gauge S&P 500 dropped an average 1.2% on the initial day of a military or terrorist event, hit bottom at -5%, 22 days later—and recouped the lost ground 47 days after that, said Sam Stovall, chief investment strategist at CFRA. As Stovall put it, “Surprisingly, the effects typically dissipated fairly quickly as investors concluded that they would not result in a global recession.”

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The worst market impact resulted from Japan’s attack on US naval forces at Pearl Harbor on Sunday, December 7, 1941. Stocks dropped 3.8% the next day and sank 19.8% in toto, CFRA data indicates. The market took 143 days to reach its bottom, and 307 days to recover.

That lengthy period makes sense. Americans initially were scared that their homeland would be invaded. By June 1942, the US defeated the Japanese navy at the crucial battle of Midway, and it became clear that the nation’s territory was safe.

The second worst military-related market rout, after Pearl Harbor’s, stemmed from the 1990 Iraqi invasion of Kuwait. The worst-case scenario at the time was that Iraq would keep going and also take over Saudi Arabia. That would have meant that a big chunk of the world’s oil would be in the hands of anti-Western dictator Saddam Hussein.

At the time, the first-day stock loss was 1.1% and the total was 16.9%. The bottom was reached at 71 days and recovery took another 189. Complicating the problem was that the US had entered into a recession a month before Iraq’s invasion. Quick action of US forces and their allies, who rushed troops to the Persian Gulf, and the unwillingness of Hussein to extend his incursion eventually quieted fears down.

The 1990 incident is instructive, because back then, the prospect of cutting off Mideast oil to the West was terrifying. Nowadays, though, such a problem is not as daunting. Today, thanks to fracking, the US actually is an oil exporter.