How to invest during geopolitical uncertainty — what the data actually shows

Every major conflict triggers the same investor instinct: sell now, figure it out later. Historical market data across many geopolitical shocks suggests a more nuanced pattern than headlines imply. Markets have often recovered faster than investors expect — and investors who stayed the course have historically fared better than those who sold in a panic.

What history shows about markets and conflict

A pattern emerges across decades of historical geopolitical shocks, though outcomes vary depending on the conflict, the macro backdrop, and the policy response. Markets react sharply, stabilize quickly, and recover within weeks — not years.

Analysis by LPL Research examining over two dozen major geopolitical events since World War II found that the S&P 500 produced an average one-day decline of just -1% in response to these events. Even large-scale conflicts triggered declines that were notable but not catastrophic. According to that same dataset, markets bottomed within an average of 18 days and recovered to pre-event levels within an average of 39 days — though individual events varied considerably.

The longer-term picture is even more striking. According to Winthrop Wealth's analysis of major events from World War II through today, the S&P 500 returned an average of +4.6% in the six months following a geopolitical shock and +11% after twelve months. Hartford Funds' research examining armed conflicts since World War II found that the S&P 500 was higher one year after the onset of conflict in roughly 70% of cases studied — a useful baseline, though the sample depends on which events are included and how "onset" is defined.

A study examining 20 major military conflicts since World War II found that the S&P 500 fell an average of 6% during these events — but recovered within approximately 28 days in 19 of those 20 cases. The one exception involved a sustained disruption to global energy supply, which is what makes the Strait of Hormuz situation in 2026 worth watching more carefully than most conflicts.

*2022 return reflects Fed rate hike cycle, not primarily the Ukraine conflict. Sources: LPL Research, Winthrop Wealth, TheStreet. Past performance does not guarantee future results.

Why markets recover faster than headlines suggest

The speed of recovery surprises most people. If a major conflict can shake markets by 5-10% in a matter of days, how do they recover in weeks?

The answer is that financial markets price risk continuously. By the time a geopolitical event hits the headlines, much of the risk has often already been partially priced into asset values — particularly in today's environment, where institutional investors use sophisticated models to monitor geopolitical probability. When the event occurs, the market is often absorbing confirmation of a risk it already partially expected rather than a complete surprise.

More importantly, markets price the future, not the present moment. While a conflict dominates every headline, analysts are simultaneously asking: will this disrupt corporate earnings? Will it derail the economic cycle? Will central banks change course? In most cases throughout history, the answer has been no — conflicts are absorbed, supply chains adapt, and the underlying economic trajectory continues.

The current Iran situation illustrates this clearly. In recent Middle East tensions, despite an initial market shock, equity markets partially recovered relatively quickly. JPMorgan analysis noted that AI sector earnings and strong corporate fundamentals provided a countervailing force that markets refocused on as immediate uncertainty eased — consistent with the historical pattern of economic fundamentals reasserting themselves.

What actually moves markets long term

If geopolitical events rarely cause sustained market declines, what does? The data points clearly to one answer: disruptions to global energy supply.

Looking at the historical record, the cases where geopolitical events caused prolonged market damage share a common thread — they involved sustained oil price shocks. The 1973 Arab oil embargo contributed to a severe recession and a peak-to-trough S&P 500 decline of roughly 48% over the 1973-74 period — though multiple factors beyond the embargo contributed to that decline. The 1979 Iranian Revolution caused a 20%+ market decline alongside surging inflation. The Gulf War of 1990-91 caused a deeper and longer drawdown than most conflicts precisely because oil supply was disrupted.

This is why energy supply chokepoints like the Strait of Hormuz warrant close monitoring during Middle East conflicts. Roughly one-fifth of global oil supply passes through the strait, though the exact share varies by measurement and year. Morgan Stanley's analysis of recent Middle East tensions identified three potential scenarios: a swift resolution that allows markets to refocus on growth; a prolonged conflict that sustains oil price pressure; and a severe scenario where the strait is effectively closed, potentially pushing oil toward $150-$180 per barrel — a level that would weigh heavily on global demand. These are forward-looking estimates, not predictions.

The second mechanism that extends market damage is when geopolitical events coincide with pre-existing vulnerabilities. The Russia-Ukraine conflict's worst market effects in 2022 cannot be separated from the Federal Reserve's aggressive rate-hiking cycle that was already underway. The conflict alone did not cause the 2022 bear market — it amplified a set of conditions that were already fragile.

What to do with your portfolio right now

The honest answer, supported by the historical record, is: less than you think.

Maintain your existing investment schedule. If you have a regular DCA contribution set up — monthly into an index fund, weekly into Bitcoin, biweekly into your 401(k) — keep it running. Pausing during geopolitical uncertainty is precisely the kind of decision that looks rational in the moment but costs real money over time. You are likely to pause near the bottom and re-enter near the recovery, which is the opposite of what the math requires.

Review your allocation, not your positions. If geopolitical uncertainty is causing you significant stress, that's information — not about the market, but about your risk tolerance. The right response is not to sell everything; it's to assess whether your allocation is appropriate for your actual risk tolerance, then adjust gradually if needed.

Consider modest defensive tilts if your timeline is short. For investors with a time horizon under three years, holding a higher cash or bond allocation during periods of elevated uncertainty is reasonable. For long-term investors with a decade or more ahead, historical evidence generally favors staying fully invested through geopolitical events rather than attempting to time around them — though this depends on the nature of the conflict and the macro environment.

Watch energy exposure specifically. If the current conflict escalates toward sustained oil supply disruption, energy-related inflation affects sectors differently. Consumer discretionary, airlines, and transportation-heavy businesses face direct cost pressure. Energy producers, defense contractors, and gold miners historically benefit from exactly this environment.

What not to do

Historical evidence points consistently toward several actions that tend to hurt long-term returns during geopolitical events, though outcomes always depend on individual circumstances:

• Don't sell in a panic during the initial shock. The average initial decline of 1-6% is real but temporary in most cases. Selling after a 5% drop and buying back after a 10% recovery means you've permanently locked in a loss while sitting out the rebound.
• Don't try to predict the outcome of the conflict. Even professional geopolitical analysts with far more information than retail investors consistently fail to predict how these situations resolve. Financial markets continuously price uncertainty into asset values. Attempting to time around events that professional analysts cannot consistently predict adds risk without reliable benefit.
• Don't abandon your long-term strategy for a short-term thesis. Rotating entirely into gold or cash because of a conflict is a bet on a specific outcome. If the conflict resolves quickly — as most do — you've traded long-term equity returns for the perceived safety of a short-term position.
• Don't increase leverage during uncertainty. Volatility creates opportunities, but it also creates traps. Leveraged positions that seem compelling at one volatility level can be wiped out if volatility increases further before the resolution comes.
• Don't conflate news volume with market impact. The conflict that generates the most headlines is not necessarily the one with the largest economic impact. Markets care about fundamentals, not news cycle intensity.

Why DCA investors have a structural advantage

The mechanics of dollar cost averaging give regular investors a structural advantage during geopolitical uncertainty that is easy to underestimate.

When markets drop 5-10% on a geopolitical shock, a DCA investor who keeps their regular contribution running is automatically buying more shares or units at the lower price. They don't need to predict the bottom, execute a perfectly timed trade, or even pay close attention to the news cycle. The system does the work by default.

This is the same dynamic that made consistent investors who kept DCA-ing through the 2022 bear market (which included the Russia-Ukraine conflict, the Fed's aggressive rate hikes, and a crypto crash) end up with dramatically lower average costs on their positions when markets recovered in 2023 and 2024.

The psychological challenge is real. Continuing to invest when headlines are alarming requires discipline that most investors underestimate. The practical solution is automation — set the contribution and remove the decision entirely. You can't talk yourself out of a contribution that happens automatically before you've had time to read the news.

Sectors that tend to hold up — and those that don't

While broad diversification remains the most reliable approach, understanding which sectors historically hold up during geopolitical uncertainty — and which don't — can help investors calibrate their exposure.

Sectors that historically benefit or hold up:

• Defense and aerospace. Government defense spending increases during and after conflicts. Morgan Stanley highlighted defense contractors, drones, satellites, and missile defense as sectors that may benefit from increased military spending momentum in elevated geopolitical environments — though this reflects analysis, not guaranteed outcomes. This is one of the clearer historical patterns.
• Energy. In oil-supply-disruption scenarios, energy producers benefit directly from higher crude prices. This is sector-specific: integrated oil majors benefit; airlines and consumer discretionary businesses with high fuel costs do not.
• Gold and precious metals. Gold's role as a safe-haven asset in uncertainty is well-documented. It has often outperformed during the initial shock phase of conflicts, though the magnitude and duration of any outperformance varies by event and the prevailing interest rate environment. Over longer periods, its performance relative to equities depends heavily on what happens to inflation and real interest rates.
• Healthcare. Defensive sector with limited exposure to geopolitical supply chains. Demand is largely inelastic.
• High-quality equities. Companies with strong balance sheets, stable earnings, and low debt tend to outperform more speculative names during uncertainty. This is consistent across multiple geopolitical episodes.

Sectors that face more pressure:

• Airlines and transportation. Direct exposure to oil price increases through fuel costs.
• Consumer discretionary. Higher energy and inflation costs reduce disposable income.
• Emerging markets with oil import dependence. Countries that import significant oil volumes face both currency and inflation pressure during energy supply shocks.
• High-growth speculative assets. Risk-off environments compress valuations on assets priced on future earnings multiples.

The bottom line

The consistent lesson from eight decades of geopolitical shocks is straightforward: markets typically absorb these events faster than investors expect, and the investors who stay the course outperform those who try to navigate around the uncertainty.

That doesn't mean ignoring the risks. The current conflict's proximity to the Strait of Hormuz creates genuine energy supply uncertainty that warrants monitoring. An extended oil disruption would create sustained economic pressure that history shows markets cannot easily look through.

But for the typical long-term investor — someone running a regular DCA strategy into diversified assets — historical evidence generally favors maintaining your schedule, reviewing your allocation if your risk tolerance is genuinely misaligned, and letting the recovery play out rather than trying to time around it. Past patterns are informative, not predictive.

The investors who tend to regret their decisions during geopolitical uncertainty are not those who stayed invested. They're those who sold during the panic, missed the recovery, and re-entered at higher prices than they sold at.