President Trump took to the podium at the White House to talk about the war with Iran, delivering a speech that sent stocks lower. (Alex Brandon/AP)
Since the end of February, all three major stock market indexes – the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite – are down several percentage points.
Someone may ask: Is that all? Don’t the markets know there’s a war going on?
Yes, the stock market knows. It just doesn’t care as much as you think.
Considering everything going on in the world, it feels like this downsizing should be worse than this.
Ben Carlson
History tells us we shouldn’t be that surprised. While geopolitical events such as the launch of military operations tend to disrupt securities markets in the short term, investors eventually turn to a longer-term view, assuming that these conflicts will eventually be resolved and the door to bullish sentiment reopens.
Major recessions in the past, such as the crashes of 1929, 2000 and 2008, were caused not so much by external events as by factors internal to business and investment, such as threats to the structure of the economy – the first was overleveraging, the second was the dot-com crash, the third was the housing collapse. These are real crashes, not short-term downturns.
The Iran war has not yet taken on the color of an economic threat, although it could become significant if oil supply disruptions caused by the closure of the Strait of Hormuz persist or tighten, or if Middle East energy infrastructure suffers greater damage.
In fact, two of the worst recent recessions were oil-related — the 1973 Arab oil embargo following the Yom Kippur War, which sent the S&P 500 down more than 16% in about six weeks; and the 1990 Iraqi occupation of Kuwait oil fields, which sent the S&P 500 down 16% in about two months.
Let’s take a look at how the stock market has fared since the U.S. attack on Iran on February 28, and then put it into the context of market behavior following other major events dating back to the start of World War II.
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From February 28 to Thursday’s close, the S&P fell 4.31%, the Dow Jones fell 5.05%, and the Nasdaq fell 3.57%. These drops are hard to watch, in part because they happened in a short period of about five weeks. But in the grand scheme of things, they are humble.
“Given everything going on in the world, this pullback should be worse than this,” Ritholtz Wealth Management’s Ben Carlson posted last week. But Carlson observed that 5% pullbacks are common in both good times and bad — there have only been three years since 1990 when there hasn’t been one.
There were two each in 2023, 2024 and 2025, all of which ended with double-digit S&P returns. Apparently, none come close to the 10% retracement known as a correction, which occurs on average every 1.8 years, according to Carlson’s calculations.
The recent pullback has come with stocks trading at historically generous valuations. This year, the S&P 500’s price-to-earnings ratio is hovering around 30 times, well above its historical average of less than 20 times. This alone should prepare investors for a reversal or even a correction.
When something like this happens during a bull market, external events are often the trigger rather than the cause. Investors look for reasons to take profits, even if those reasons may have nothing to do with market behavior.
To put things into perspective, let’s look back at how the stock market has reacted to major global events in the past. (Thanks to Ryan Detrick of the financial consulting firm Carson Group for compiling these statistics.)
The attack on Pearl Harbor on December 7, 1941 caused the S&P to fall 11% over the next three months, but a year later the market was up 4.3%. One month after Richard Nixon resigned on August 9, 1974, the stock market fell 14.4%; a year later it rose 6.4%. Markets have completely shrugged off the effects of the Cuban Missile Crisis, the JFK assassination, the Hamas attack on Israel on October 7, 2023, and Russia’s 2014 annexation of Crimea and 2022 invasion of Ukraine; none of which were associated with the subsequent month’s market decline.
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Even if something does happen before a market decline, stocks tend to recover within weeks or months. In 1950, North Korea invaded South Korea and started the Korean War, sending the market down 12.9% over the next two weeks, but as RBC Wealth Management’s Kelly Bogdanova documents, the market recouped its losses over the next 56 trading days. Similarly, Russia’s invasion of Ukraine in February 2022 was cited as the cause of a 7.4% drop over the next two weeks, but the market broke even after 27 trading days.
Bogdanova noted that the 1990 invasion of Kuwait caused the market to fall 16% in seven weeks, after which the market did not break even for the next four months. But this is talking about oil.
The current market environment may be unique in that it is entirely in the hands of one reckless individual. As the late Michael Metz of Oppenheimer & Co. told me, stocks generally rise during periods of economic growth and recession, as long as investors know where things are going.
What they hate is uncertainty, and no one is as keen as Trump to squeeze uncertainty until it screams for mercy. Consider how his announcement of “Liberation Day” tariffs rocked markets, a false protectionist stunt that took place on April 2, 2005, so Thursday marks its one-year anniversary.
Harsh tariffs are announced, modified, partially withdrawn, reimposed, and so on until investors get uneasy with the merry-go-round. The Supreme Court finally put a stop to the shenanigans on February 20.
A month after the initial announcement, investors still don’t know what to think. The S&P was almost flat, the Dow fell 2.15% and the Nasdaq rose 2.1%. Since then, investors have learned enough about Trump’s decisions to ignore the rumors. (That’s the TACO trade, which stands for “Trump Always Cowardly.”) As of Thursday, the S&P had gained 13.7% since Liberation Day, the Dow Jones had gained 9.1%, and the Nasdaq had gained 19.3%.
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The Iran war itself was a violent war. Markets rise and fall depending on whether investors buy into Trump’s optimism or become frustrated with no end in sight, a judgment that could change by the minute. But it remains within a narrow range of 3 to 5 percentage points.
The latest week provides a good example: On Tuesday, stocks had their best day in months, with the Dow Jones rising 1,125 points, or 2.49%, and other indexes performing roughly in line.
But on Thursday, stock index futures markets tumbled after Trump delivered a hollow address to the nation, ostensibly out of frustration that he didn’t provide an end date or show he knew what he was doing. However, investors did not show the same anxiety once trading began, causing the index to enter a kind of fugue state. The S&P edged up 7.37 points, or 0.11%, the Dow fell 61.07 points, or 0.13%, and the Nasdaq gained 38.23 points, or 0.18%, on a fraction of the volume seen in recent weeks. The trading range remains unchanged.
Of course, major developments have the potential to wake the market from its slumber. For example, a ceasefire, or other bad things. Or the Iran war will transition into a new phase that resembles oil embargoes of the past, rather than temporarily disrupting the status quo. We won’t know until it happens.
Until then, the options for the average investor are to either move all their money into cash or ride the wave.
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This story originally appeared in the Los Angeles Times.
