Lately, we've been witnessing a military operation every month. This time in Iran. Coincidentally, they almost always happen on weekends, with the financial markets closed. But then Monday comes and the stock exchanges reopen. Should we be alarmed?
In practice, nobody knows what the market will do on Monday after a military action. However, based on past experience, high volatility is to be expected. Any armed conflict usually causes sharp drops in stock markets due to increased geopolitical instability, the rise in the price of raw materials like oil, and the appreciation of the ultimate safe haven: gold. But does this volatility last for weeks or months? The answer is also clear: no.
External market shocks usually have a limited duration, lasting days or, at most, weeks. This happened with Russia and Ukraine, with Israel and Gaza, with the imposition of new tariffs, and also with Covid-19. If we broaden our perspective beyond specific days, we observe that the stock market eventually resumes its upward trajectory. It's important to remember that every trend has highs and lows; what truly matters is that they are upward.
It's also common that, if an attack was foreseeable—as in the case of Iran, which many analysts had already anticipated—the impact is more moderate because prices had already priced in its effects (the market has been falling for weeks). Furthermore, this time there's a market open over the weekend: Bitcoin. When the news broke, its price suddenly dropped 5%, but it recovered over the following hours to end up in positive territory.
What will happen on Monday is uncertain. What we do know is that, in a few weeks, the effect of this episode will likely have disappeared.
