ASSANTE MARKET UPDATE – RELATIONSHIP BETWEEN WAR & MARKETS

 

As you’ve likely seen in the news, the world unfortunately finds itself dealing with another military conflict. It’s sad — and frankly a little crazy — that in a modern world of advanced technology, artificial intelligence, space travel, and incredible innovation, humanity still struggles to resolve conflicts peacefully.

Given the headlines and the recent market volatility, I wanted to send a quick note to provide some perspective and remind everyone how markets historically respond to events like this.

The short version: geopolitical conflicts can create short-term volatility, but they rarely change the long-term direction of markets.

Before getting into that, I want to be clear: the market is not in a major correction — at least not yet.

As of Friday, the U.S. market is roughly 3–4% off its all-time high. Not down 3–4% on the year — simply off the peak. We haven’t even reached a 5% pullback, which normally happens several times in a typical year, and we are still far from what would be considered a normal correction of about 10%.

To put things in perspective, markets fell around 20% just last year, yet the year still ended quite strong. In fact, the recent volatility has been relatively orderly given the magnitude of the headlines.

Typically, a small move like this wouldn’t warrant a note. However, given the uncertainty surrounding large-scale military operations and the fact that these events can understandably feel unsettling, I think it’s important to provide some context. I also suspect the uncertainty, and volatility may persist for a period of time, so I want to make sure everyone is prepared.

It’s also worth noting that markets rarely move because of just one headline. More often it’s a combination of factors building beneath the surface. Even before the Iran developments, there were signs of fatigue in parts of the tech trade and growing questions around private markets. The market had largely shrugged these off, but the latest geopolitical tension may have simply been the catalyst that tipped the scales.

Markets Have Seen This Before 

While wars and geopolitical conflicts are alarming, they are unfortunately not uncommon. Even in just the past few years we’ve experienced numerous geopolitical tensions — the ongoing Russia-Ukraine war, the Israel-Hamas conflict, last year’s strikes on Iranian nuclear facilities, tensions involving Venezuela and Greenland, and several other regional conflicts that receive far less media attention.

My point is simple: markets have seen events like this many times before.

And while markets often react negatively in the short term — largely due to uncertainty — geopolitical events are rarely the long-term drivers of markets. History consistently shows that markets eventually stabilize and recover.

What Actually Matters for Markets 

On a human level, of course the conflict is concerning.

But on a professional level, like any geopolitical, political, or economic event, what I care most about is how it affects company earnings.

Ultimately, earnings growth is what drives markets over time.

Right now, we are paying close attention to three things:

• The length of the conflict
• The risk of further escalation
• And most importantly, the price of oil and natural gas

Iran itself produces roughly 3% of global crude oil, much of which is exported to China. For that reason, markets are less focused on Iranian production itself.

The bigger concern is the Strait of Hormuz, a narrow shipping route through which roughly 20% of the world’s crude oil and liquefied natural gas flows.

If tensions escalate and Iran attempts to restrict transit through the strait, energy prices could move higher. We’ve already seen oil spike in response to the news.

A prolonged rise in oil prices can increase costs for both businesses and consumers:

• transportation costs rise
• manufacturing becomes more expensive
• supply chains become more costly
• gasoline, heating, and energy bills increase

Higher energy prices can also push inflation higher. And if consumers are spending more at the gas pump, they have less money to spend elsewhere — which can affect company earnings.

We’re not there yet, but it’s something markets are watching closely.

A Little Perspective

When emotions run high, it can be helpful to step back and look at the data.

This chart provides helpful perspective. Over the past century, markets have navigated through dozens of wars and major geopolitical conflicts. While these events can cause short-term volatility, the long-term trajectory of markets has remained upward.

Same story here.

Markets often react first and think later. But historically they have recovered relatively quickly, with the U.S. market often delivering solid returns in the year following major geopolitical shocks.

We may know this intellectually, but sometimes it’s helpful to see the data.

The Reality of Investing

Market corrections are normal.

They are not a bug in the system — they are a feature.

Every time it happens, it feels like this time is different. And yes, the cause is always different — war, inflation, interest rates, a pandemic, politics, tariffs, or something else.

But historically, the outcome tends to be the same.

Markets fall about 14% on average during a typical year. That’s normal. As mentioned earlier, we are nowhere near that level right now — but it’s important that we stay comfortable with that reality.

Short-term uncertainty is simply the price we pay for long-term returns.

In fact, market downturns aren’t just inevitable — they’re a necessary part of achieving strong long-term investment returns.

If it isn’t a military conflict, it will be something else that causes markets to pause.

After three very strong years of market returns, it would actually be quite normal for markets to pause, digest gains, and become more sensitive to headlines for a period of time.

Final Thoughts 

If things become more volatile or the headlines become scarier, remember that this is exactly when discipline matters most.

Our strategy does not change because of headlines. It remains the same as it has always been: stay diversified, stay patient, and stay focused on the long term.

And of course, if you ever feel uneasy or simply want to talk things through, that’s exactly what I’m here for.

Adil Mohammed,CFP®, CIM®, FCSI®
Wealth Advisor, CI Assante Wealth Management Ltd.
Mutual Fund Registered Advisor

 

The opinions expressed are those of the author and not necessarily those of CI Assante Wealth Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. CI Assante Wealth Management Ltd. is a Member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.