Could the Iran-Israel conflict crash the ASX 200? History says no
Historical data shows geopolitical events typically cause short-term market pressure but markets recover within a month.
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KEY POINTS
- Iran-Israel conflict has escalated significantly over four days with oil prices surging 12% and Brent crude hitting US$74.7 per barrel, yet the ASX 200 remains resilient
- Historical data shows geopolitical events typically cause short-term market pressure but markets recover within a month, with the key factor being whether the economy is in recession during the conflict
- During non-recessionary periods, the ASX 200 delivers strongly positive returns across all timeframes following geopolitical events, while recessionary periods show negative returns
The Iran-Israel conflict has significantly escalated over the past four days, with both sides broadening their strikes and dominating global headlines. Oil and gold prices have surged on fears of disrupted Iranian energy production and growing safe-haven demand, yet the S&P/ASX 200 remains flat on Monday.
While the local sharemarket shows resilience, the conflict is drawing international concern and raising fears of a protracted regional war. The UN, G7 leaders, and French President Emmanuel Macron have urged restraint, while Russia condemned Israel's strikes as violating the UN charter.
Iran's Supreme Leader Ayatollah Ali Khamenei has vowed a "harsh response" and "severe punishment," with IRGC and military commanders pledging continued retaliation. Meanwhile, Israeli Prime Minister Benjamin Netanyahu frames the strikes as essential for Israel's survival, hinting at possible regime change in Iran.
Historical perspective: How markets respond
History provides valuable context for how the S&P/ASX 200 performs during major geopolitical events. The data highlights a relatively straightforward narrative: events typically drive short-term downward pressure on equities, but after a month, markets remain largely unaffected.
Source: Author's own research
The recession factor makes all the difference
The most important factor influencing post-conflict returns is the state of the economy. Across ten major conflicts examined, three either triggered recessions or occurred during recessionary periods:
The Iraq-Kuwait War saw oil prices spike from US$15 to US$40, compounded by Fed tightening in response to rising inflation. Unemployment peaked at 7.8% in mid-1992 while GDP contracted 1.5%.
The September 11 attacks exacerbated economic headwinds from the existing dot-com recession.
The Iranian airstrike did not occur during a recession but was followed by the pandemic's severe economic downturn.
When the US is in recession, the ASX 200 shows negative average forward returns across all timeframes. Conversely, non-recessionary periods deliver strongly positive returns across all timeframes.
Source: Author's own research
Current outlook and risks
While history suggests these events typically fade within a month, current circumstances present a number of risks. Both sides are showing no signs of de-escalation, raising fears of a protracted regional war potentially involving the US and other powers.
Oil prices have surged around 12% over four sessions, with Brent crude trading near US$74.7 per barrel — the highest since late February. This spike is taking place just as inflation is returning to central bank targets of 2-3%. A sharp rise in oil prices could affect consumer prices and force central banks to reconsider their easing expectations, making this conflict especially significant for monetary policy.
This is all taking place at a time where the ASX 200 has experienced a dramatic V-shaped rally of approximately 17% from post-Liberation Day lows and is now trading at record levels, potentially leaving markets more vulnerable to disruption and profit taking.
However, recent precedent offers some perspective. Just nine months ago, markets faced a similar escalation between Iran and Israel. While that conflict initially dented performance and drove the S&P 500 VIX from 15 to the low 20s, the impact proved temporary — much like the historical pattern we've observed. By November, the crisis was well in the rear-view mirror.
Overall, every geopolitical event should warrant some investor respect and concern. But history favours being on the right side of market overreactions.
