Tensions surrounding the U.S. and Iran have escalated further following reports that President Trump ordered an airstrike in Baghdad that resulted in the death of Iranian General Qassem Soleimani. Middle East experts view this latest action as the most dramatic since the standoff in May. As a result, there have been calls by global leaders for calm and restraint but all sides, especially for the U.S. and its regional allies, are on high alert for retaliation by Iran. Further complicating matters was that an Iraqi militia leader, Abu Mahdi al-Muhandis was also killed in the airstrike, prompting Iraqi Prime Minister Adil Abdul-Mahdi’s to proclaim the attack as an “aggression against the Iraqi state, government and people”.
What happens next? While we do not have a definite answer, the potential for further escalation in the region of tit-for-tat actions raises a red flag for a path to war. This concern appears to be broadly shared by our colleagues as overnight, we received several inquiries about what would happen to markets in the event of a U.S.-Iran war.
Looking at a sample of past U.S. wars and conflicts, we find some interesting data points:
- The typical sell-off is relatively shallow at 6.3%. The range is from -2.8% for the recent airstrike in Syria in 2017, to -12.9% around the Korean war.
- The duration of the sell-off is short lived. The median number of days of the sell-off is 17 while it takes roughly an equal amount of time to recover at 16 days.
- Lastly, 80% of the time, the market is up in the subsequent three months and 93% of the time in the following 12-months.
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