An investor panicking over lower stock prices

What History Teaches Us About Market Shocks

by Tami McDonald | Apr 16, 2026 | Financial Wellness

When stock prices dip, it is natural to feel a sense of panic. Our collective memory jumps to the “Big Ones” – the Great Depression in 1929 and the Great Recession in 2008 – and we wonder if the current situation will match that level of infamy.

However, the reality of market shocks is more nuanced. Most market “shocks” are short-lived events that are triggered by geopolitical tension, energy spikes, or sudden shifts in investor preferences.

In fact, recent history is littered with shocks that were terrifying to experience but have faded from memory as markets recovered. At present, these “forgotten” market shocks appear more applicable to the current economic and geopolitical situation than the larger, enduring downturns of 1929 and 2008. By understanding how the markets weathered smaller storms throughout the past, we can find more clarity and confidence today.

The Basics: How Oil and Geopolitics Impact Stocks

Before diving into historical context, it is important to understand the broader impact of energy prices and global politics on stocks in the United States. It may seem that a conflict thousands of miles away should have a similarly distant impact on domestic companies, but in today’s interconnected world, that isn’t the case.

As globalization has taken hold, U.S. companies are selling their products in more locations than ever, and they are similarly sourcing their inputs and energy from across the globe. Energy stocks constitute only about 3.5% of the S&P 500, but when the price of oil rises it also impacts other areas:

Transportation. Flying and driving become more expensive, raising the cost to deliver raw materials to businesses and finished products to consumers.
Manufacturing. Chemicals, plastics, and industrial goods use petroleum products during production, so higher oil prices raise the cost to produce goods.
Consumer Goods. Higher costs for manufactured goods and transportation of those goods are often passed down from companies to consumers, which can dampen sales and raise prices.

Beyond these tangible expenses, higher oil prices and geopolitical tensions can have a profound impact on investor sentiment. Some investors trade based on sentiment alone, while others base their trades on the calculated value of future company profits. In both cases, fear of higher prices or supply constraints can greatly impact trading behavior and consequently, stock prices.

Historical Context: Past Energy and Geopolitical Shocks

Energy prices and geopolitical conflicts have caused numerous shocks to stock markets and the economy in the course of U.S. history. The following five periods occurred in the modern era, and they showcase how stocks responded to events that threatened the globalized world economy.

The 1973 Oil Embargo

In October 1973, OPEC stopped exporting oil to the U.S. after our involvement in the Yom Kippur War. The U.S. lacked the domestic production capacity that we have today, and the reduced supply caused oil prices to jump from $2.75 a barrel to over $11 by March 1974.

Surging oil prices and rapidly rising inflation were key tenants of the economy during this time, and the S&P 500 fell by roughly 48% between January 1973 and October 1974. The stock market recovery was long and painful. To make matters worse, this oil price shock and the resulting inflation were compounded by the Vietnam War and Watergate. Inflation would continue to present a problem throughout the decade and would not be solved until the early 1980s.

The 1979 Iranian Revolution

Iranian oil production fell by 4.8 million barrels per day amid the country’s revolution in 1979, representing a 7% decline in the global oil supply. The reduction was relatively small, but the fear of a shortage led to “speculative hoarding,” and oil prices doubled in a single year.

The S&P 500 dropped by 17% in early 1980 as fear and higher oil prices weighed on stocks. Despite record high interest rates, the index recovered in just 112 days.

The 1990 Gulf War

When Iraq invaded Kuwait, the world feared for the stability of oil markets. Both countries were producers, and the world feared that a prolonged war could remove their exports from the market. Those anxieties were not unfounded, as the war removed 4.3 million barrels per day from the global oil supply. This led oil prices to surge from $15 to $40 per barrel in just two months.

The S&P 500 dropped by 10% in the two months following the invasion. Early the following year, the U.S. entered the conflict and stocks began to rebound. By the time the cease-fire was signed on March 1, 1991, the S&P 500 was up by 17% from the start of the war.

The 2001 War on Terror and the Dot-Com Bubble

When the U.S. was attacked on September 11, 2001, stock markets were already in turmoil following the bursting of the “Dot-Com” bubble. The attack created a unique situation of geopolitical fear combined with severely devalued tech stocks.

One bright spot in the situation was that oil prices remained relatively low for the first year of the War on Terror. However, they began to rise in 2003, which compounded an already complex economic situation.

The economy recovered fairly quickly from the geopolitical tension, but stocks didn’t match their previous highs until 2007. The stock market recovery took much longer than previous shocks in part because this period involved a fundamental shift in opinions on tech stocks and the way they are valued.

The 2022 Russian Invasion of Ukraine

When Russia invaded Ukraine, the world saw another bout of geopolitical turmoil that impacted oil markets. Russia was a major exporter of oil to Europe, and their oil was essentially removed from that market by sanctions. Previous importers of Russian oil had to turn to other sources for their energy, which constrained supply and caused a spike in energy prices.

The S&P 500 sank amid the early months of this conflict and hit a trough in October 2022. Stocks recovered and reached new all-time highs by January 2024, though the conflict that began the downturn has not yet been resolved.

Lessons Learned from Past Market Shocks

The impact of a market shock varies based on the economic situation and investor sentiment before, during, and after the inciting event. However, past market shocks have taught a few enduring lessons.

Markets Are Resilient

While market shocks can be terrifying to endure, U.S. stock markets have a 100% track record of recovering from geopolitical events and even economic recessions. Stock prices have remained subdued for months, sometimes years, following a correction, but they have always bounced back. This past performance isn’t a guarantee of the future, but it does provide a boost of confidence.

Fear Moves Faster Than Reality

Past market shocks have taught us that initial, steep drops in stock markets often occur based on what might happen, not what has actually happened. Alan Greenspan, former chairman of the Federal Reserve, explained, “Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria…Contagion is the critical phenomenon which causes the thing to fall apart.”

Greenspan’s view can be proven in past stock market cycles, particularly when an industry-specific bubble bursts. It can also be seen in past energy shocks and geopolitical events, when stocks drop dramatically at the onset of an event, before supply chains are even impacted.

In some cases, investor fear is proven correct, and stock markets take significant time to recover from the actual events that impact businesses and consumers. In others, fear itself is the main cause of a stock market drop, and stock prices recover quickly once nerves settle.

Timing The Markets Rarely Works

Attempting to “sell high, buy low” seldom outperforms a long-term investment strategy. The main reason why timing the markets has historically yielded such poor results is that you must be “right” twice in order to maximize profits. You must correctly predict the bottom of the market and the time when it reaches its height.

Looking backwards, the peak and trough of a particular market event are easy to spot. However, while events are unfolding, it is extremely difficult to pinpoint these highs and lows – and often very costly to try.

Diversification is a Shield Against Sector-Specific Drops

A diversified portfolio helps insulate your overall net worth from market shocks. During your saving years, diversification allows you to profit from sectors that perform well during market shocks, which offsets some losses from sectors that perform poorly. Additionally, during retirement, securities of different types and in different sectors provide options when selling to meet your income needs.

Overall, a steady, consistent investing philosophy combined with a diversified portfolio has historically been a shield against short-term market fluctuations. An experienced financial advisor is your rock during challenging times and can help you meet financial goals even when markets are turbulent.

Navigating the Markets with Brookstone Wealth Management

At Brookstone Wealth Management, we guide you through good markets and bad ones. Our team works diligently to keep pace with changing market conditions and make recommendations designed to help our clients financially succeed, even during tough times.

Our comprehensive wealth management plan, Financial Fingerprint®, includes a customized investment plan designed to help you succeed in changing market conditions. Best of all, this plan is supported by our team of experienced financial professionals who have weathered many types of markets.