What happens to stocks after a geopolitical market shock?

It was a date that would live in infamy.

President Franklin D. Roosevelt used those words to describe the Japanese attack on U.S. military bases in Pearl Harbor and the Philippines.

The attack on the U.S. Navy base in Hawaii destroyed or damaged dozens of American ships and hundreds of aircraft and killed over 2,400 civilians and military personnel.

“No matter how long it may take us to overcome this premeditated invasion, the American people in their righteous might will win through to absolute victory,” Roosevelt told a joint session of Congress.

The shock of what FDR called an “unprovoked and dastardly attack” was felt all over the country, including Wall Street.

The Dow Jones Industrial Average tumbled 3.5% when the market opened on Dec. 8, while the S&P 90 — the forerunner of today’s S&P 500 — suffered a 3.8% one-day loss and experienced a total drawdown of nearly 20%.

Markets had suffered one of the largest, fastest stock market declines of the 20th century just 18 months earlier, on May 10, 1940, when Germany invaded France.

The Wall Street Journal said at the time the market was “well-charged with psychological dynamite” due to fears that the rapid, unchecked advance of the Nazi army would lead to the imminent fall of England.

The impact of the Pearl Harbor attack — and other crises throughout history — is likely on the minds of investors following the U.S.-Israeli strikes on Iran on Feb. 28.

Smoke rises following reported explosions in Tehran on March 2.

Photo by MAHSA on Getty Images

Analysts see pattern after major events

The Dow dropped over 400 points, or roughly 0.8%, on March 3 following intensified strikes on Iran, after falling as much as 1,277 points before paring losses.

The S&P 500 saw an initial sharp drop of up to 2.5% before trimming losses to close around 0.9% to 1%. Both indexes were up nearly 1% at last check.

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Analysts reviewing the impact of geopolitical events on the market see a pattern where stocks are initially battered by grim news but eventually recover.

“Looking at a wider list of historical events, from Pearl Harbor to the Cuban Missile Crisis, from the 1987 stock market crash to 9/11, and from Brexit to the Russia-Ukraine conflicts, stocks have repeatedly demonstrated resilience,” George Smith, Portfolio Strategist for LPL Financial, said in a research note.

Smith said that reviewing market reactions across more than eight decades of market history “helps us understand how stocks typically behave when the unexpected happens, and which conditions matter most to determine the likely depth and duration of any drawdowns.”

“Across more than two dozen major geopolitical events since World War II, the S&P 500 has produced an average one-day decline of just -1%,” he said. “In other words, even seemingly dramatic world events tend to trigger declines that are notable, but not catastrophic.”

He stressed that it is important to note that past performance does not guarantee future results.

Smith noted that markets generally absorb shocks quickly, stabilizing within 18 days on average and returning to pre-event levels in under 39 days. “Importantly, the scale of the initial event rarely predicts the magnitude of the market impact,” he said.

Reviewing more than 40 major events — from wars to corporate failures, terror attacks to natural disasters — he said universal lessons emerge:

Markets dislike uncertainty but adapt quickly.
The economic backdrop matters more than the event itself.
Shocks rarely alter long-term fundamentals unless conditions are already fragile.

Timing of events matters, expert says

He added that these patterns hold across expansions and recessions, though shocks can accelerate weakness when conditions are already fragile.“The single most important factor determining market performance after a shock is whether the economy is already in or near a recession,” he said.

“If a shock occurs during an expansion, then markets are typically flat to modestly positive over the next month followed by positive returns over the next three, six, and 12 months.”

However, Smith said that if a shock occurs near a recession, markets tend to fall across all timeframes, and the average 12-month post-shock return near a recession is -11.5%.

“Shocks can add volatility, but they rarely derail a fundamentally sound economy,” he said. “However, if conditions are already fragile, the event can accelerate or amplify existing weakness.”

Eric Parnell, chief market strategist at Great Valley Advisor Group, reached a similar conclusion in a 2023 report following the surprise Hamas terrorist attack on Israel.

“Put simply, while the political and human impact of war is profound, financial markets have historically been largely unaffected by such conflicts over time outside of an immediate impact that is quickly traded away,” he wrote.

Parnell cited the 9/11 terrorist attacks that forced the closure of the U.S. stock market for four trading days.

Stocks fell by more than 8% immediately after the market reopened and proceeded to decline by as much as 15% over the next few trading days, he said.

However, by September 21, stocks had bottomed, and less than a month later, they had recovered all their lost value. By early December 2001, stocks were up by more than 3% from their pre-attack levels.

“Geopolitical events like the outbreak of war are unnerving in many ways,” Parnell said, “and the tragic human and personal impact of these events cannot be overstated.”

“But when it comes to capital markets, we have seen throughout history that the associated impact outside of any immediate-term reaction to crisis is minimal.”