Bell Potter: What every investor should know about wars and market sell-offs

It’s one of the most predictable patterns in global finance: war breaks out, energy prices spike, and markets take a beating.

For those newer to investing, the reaction to the latest attacks in Iran may feel dramatic. In reality, it’s a pattern investors have seen many times before.

According to Bell Potter strategist Rob Crookston, markets tend to react quickly to geopolitical shocks, but the damage rarely lasts as long as investors fear.

“The moves have been swift but based on a long historical record, they are also most likely temporary,” Crookston wrote in a recent note to clients.

In other words: markets tend to panic, yet they also recover surprisingly fast.

In this wire, we lean on Crookston’s analysis of past conflicts to understand what typically happens to oil, equities and investor sentiment when war breaks out - and what investors should do next.

The first move: oil up, equities down

When conflict erupts, markets immediately begin pricing the most obvious risk: energy disruption.

Oil and gas prices surged on fears that supply from the Middle East is at risk, while equities sold off as investors reassessed the growth and inflation outlook. 

The Betashares Crude Oil Index Currency Hedged Complex ETF (ASX: OOO) is up roughly 25% over the past month, closely tracking the surge in global oil prices.

Its recent rally also lines up with several geopolitical flashpoints over the past few years - including the U.S. strikes on Iran in 2025, the Israel–Hamas war in 2023, and the Russia–Ukraine invasion in 2022 - all events that injected a geopolitical risk premium into energy markets.

When conflict threatens energy supply, oil is usually the first asset to react. From there, a familiar pattern tends to play out across global markets.

• Equities typically fall, with the steepest declines in sectors most exposed to fuel costs and travel demand including airlines, shipping and logistics.
• Bond markets often sell off as well, signalling rising inflation fears rather than concerns about economic growth.
• And then there’s the US Dollar, which tends to reclaim its safe-haven status during periods of geopolitical stress.

But every episode has its nuances.

This time around, one traditional safe haven hasn’t behaved as expected: gold.

Despite heightened geopolitical uncertainty, the precious metal has actually slipped. Crookston believes the answer lies in the inflation implications of higher oil prices.

“Gold has fallen because the conflict-driven spike in oil prices sparked fears of ‘higher-for-longer’ interest rates and a surging US dollar. That prompted investors to liquidate the non-yielding metal for cash and to meet margin calls," Crookston says.

The pattern investors forget

While the headlines feel dramatic, history suggests these shocks rarely cause lasting damage to equity markets.

Crookston analysed several major geopolitical events over the past three decades including the Gulf War, the Iraq invasion and Russia’s attack on Ukraine. The pattern is remarkably consistent.

Markets fall initially, often sharply, before recovering once it becomes clear the conflict won’t trigger a broader economic crisis.

The same logic applies to oil, albeit inversely. Prices spike, and then eventually settle back down.

"Conflicts produce fear, volatility, and near-term dislocations. They rarely produce the kind of sustained, structural damage that permanently impairs long-term investment outcomes," he says.

So what should investors do?

Of course, as investors we like to make money, especially from volatility. But when geopolitical shocks hit markets, should we put on our trading hats and start going long and short oil and equities?

You could. But you’d be doing it at your own risk.

As Crookston notes, the real challenge is the “velocity of the market’s response” to geopolitical news. Things can change in the blink of an eye.

“While a perfectly timed exit and entry would be the ideal outcome, these episodes are often defined by rapid V-shaped recoveries,” he says.

“Sentiment can shift on a single headline; therefore the risk is that investors miss the sharpest leg of the rebound, which has historically proven more damaging to long-term performance than weathering the initial volatility.”

That’s not to minimise the risks. The Strait of Hormuz, through which roughly 20% of global oil supply passes, remains a key vulnerability. A sustained disruption would represent a real energy shock, with implications for inflation, growth, rates and, ultimately, equity prices.

But history suggests the start of a conflict is rarely a catalyst for a prolonged sell-off. 

"Well-diversified portfolios, held with discipline through periods of uncertainty, consistently produce better outcomes than those managed reactively," he says.

And one final wrinkle: Donald Trump does not like seeing the stock market down.