We’re on the verge of closing out the first full week of war with Iran and understandably, the markets and the news are reacting accordingly. The CBOE Volatility Index (VIX) rose to its highest level since the announcement of tariffs last April. The VIX is commonly known as the “fear gauge” and reflects investor sentiment and perceived risk of significant price swings in either direction. So, let’s discuss what’s happening and look at previous wars to give us some guidance of how things may play out regarding the stock market in the weeks and months ahead.
When we think about wars, we might consider the Vietnam War, the first Iraq invasion (Gulf War), and the war in Afghanistan. Historically, the US stock market has experienced short-term volatility and declines in the immediate weeks following military action, though it typically recovers and trends upward over the course of the conflict. The market’s reaction to the Vietnam War was characterized by resilience followed by long-term stagnation. Surprisingly, the Dow Jones Industrial Average (DJIA) increased by 7% in the months following the start of the war in March 1965.
The Gulf War, which began in August 1990, was initially different. The immediate reaction was a three-month decline of roughly 13.5% to 16% in the S&P 500. The war triggered a more significant immediate sell-off due to oil price shocks. Similarly, Operation Enduring Freedom was heavily influenced by the preceding 9/11 attacks and the ongoing “dotcom” bubble collapse. In the two weeks following the 9/11 attacks, the DJIA fell over 14% and the S&P 500 fell more than 11%.
But here is the important takeaway. In all three events, there was a robust recovery. By the time the Vietnam War ended in 1973, the market was up 43% averaging roughly 5% per year. Once Operation Desert Storm launched in January 1991, the market rallied 17% in just four weeks. The S&P 500 fully recovered its pre-invasion losses within several months and ended 1991 up roughly 26%. And Operation Enduring Freedom saw markets recover to pre-attack price levels by mid-October 2001 around the time bombing in Afghanistan began. Despite the broader bear market, the DJIA gained 13% and the S&P 500 gained 5.6% during the first six months of the war. While no two wars are the same, we see a pattern of recovery after an initial decline.
Is this time different? If I had to guess, I’d say probably not. Much like the Gulf War, oil will be a trigger for rising gas prices and renewed fears over inflation. WTI Crude has already risen by approximately 33% from $66 per barrel to $88 per barrel in just the past week. The pundits are already talking about oil rising to $100 per barrel with Iraq taking more than 3 million barrels per day off the market. The Federal Reserve was already uneasy with where inflation stands and seemed unlikely to lower interest rates before June. At this point, it is hard to know how long the U.S. will be in Iran. The President initially said Operation Epic Fury would last four to five weeks before changing his response to “whatever it takes.” No one is currently expecting a long and drawn-out war, but the goalposts continue to shift as the situation on the ground changes.
In closing, let’s briefly talk about the February Jobs Report which was released today. The report shows an unexpected downturn in the US labor market with nonfarm payrolls falling by 92,000, missing the consensus of a 50,000 to 60,000 gain. Healthcare, which traditionally has been a bright spot, saw a significant decrease largely attributed to strike activity. Both government and manufacturing jobs remain under pressure. The near-term outlook for the US job market is characterized by uncomfortably slow growth and a “low-hire, low-fire” dynamic for the first half of 2026. If you happen to be in the market for a job, or are a recent college graduate, these are tough times. I wish I had better news to report but this is where we are at the moment. Now you know.
Bruce J. Mason, MBA
