Buy the dip? History suggests geopolitical shocks can create opportunity

Jeffrey Schulze

Escalating tensions in the Middle East have once again rattled global markets with oil markets at the centre of investor concern. The possibility that Iran could disrupt the Strait of Hormuz, a critical chokepoint through which roughly 20%–30% of global seaborne energy trade passe, has driven a sharp move in energy prices.

“While geopolitical shocks often create short-term turbulence, history suggests that investors should resist the urge to retreat. In fact, periods of geopolitical stress have frequently created buying opportunities,” Jeffery Schulze, Head of Economic and Market Strategy, ClearBridge Investments says.

“Looking at past geopolitical flare-ups, the S&P 500 Index has, on average, delivered positive returns over the one, three and six-month periods following such events.

“Even during larger conflicts that escalated into full-scale wars, the record is mixed rather than uniformly negative. In many cases, broader macroeconomic conditions ultimately proved more influential than geopolitical developments.

“Some of the weakest market outcomes following military escalations occurred during periods when the US economy was already entering recession — including 1973, 1979 and 1990. These episodes suggest that economic cycles, rather than geopolitical events themselves, tend to be the primary drivers of sustained market weakness.”

He adds “But for financial markets today, the most important transmission mechanism from the Middle East conflict to the global economy is oil. Higher oil prices historically acted as a significant drag on US growth. However, the structure of the US economy has changed considerably in recent decades.”

The United States is now a net producer of energy rather than a net consumer. As a result, rising oil prices create a more balanced economic effect. “While higher fuel costs can dampen consumer spending, increased energy production can also support employment, investment and corporate profits within the domestic energy sector,” says Schulze.

“Another structural shift further reduces the economic impact of rising energy prices: American households now spend a much smaller share of their budgets on energy than they did historically.

“Today, direct spending on energy goods and services accounts for less than 4% of US consumption. That is well below the nearly 5% share seen in early 2022 when Russia invaded Ukraine, and even further below the levels recorded ahead of the Gulf War in 1990 and the Iraq War in 2003.”

This decline reflects decades of efficiency improvements, including higher fuel economy standards, as well as rising overall household income. As a result, increases in energy prices tend to exert less pressure on consumer finances than in previous geopolitical crises.

While rising energy prices could temporarily lift headline inflation, the Federal Reserve is unlikely to react aggressively.

Oil price spikes are generally viewed as supply shocks, something monetary policy is less effective at addressing. During previous energy-driven inflation episodes, including those following pandemic supply disruptions, the Fed has tended to focus more heavily on underlying inflation trends.

In particular, policymakers closely monitor “core” inflation measures such as core Personal Consumption Expenditures (PCE), which exclude volatile commodity prices like oil. These measures are likely to show a much smaller impact from energy price movements.

“Given this dynamic, we continue to expect the Federal Reserve to begin cutting interest rates in the second half of the year.

“Despite recent volatility, the broader economic outlook remains constructive. While the events in the Middle East have introduced some uncertainty, they have only modestly altered our economic expectations heading into 2026.

“History suggests that geopolitical shocks rarely derail markets for long. More often, they create temporary dislocations that long-term investors can use to their advantage. For investors willing to look beyond short-term headlines, the evidence remains clear: buying geopolitical dips has historically been a rewarding strategy,” he notes.

 By Jeff Schulze, Head of Economic and Market Strategy