After the outbreak of US-Iran conflict, the market experienced intense volatility. Retail investors hurried to sell off or chase after the assets that had already surged, while institutions remained on the sidelines. A former investment banker analyzed the “three-stage capital flow pattern” repeatedly validated from the Gulf War, Iraq War, to the Russia-Ukraine War, pointing out that retail investors almost always suffer structural losses in geopolitical conflicts. The real timing for strategic positioning is often not during the storm but after it has passed. This article is based on Felix Prehn’s piece “How The US Iran Conflict Will Make Experienced Investors Rich,” translated and edited by Dongqu.
(Background: Is Bitcoin really a safe haven asset? Comparing the last three wars, does BTC outperform gold and the S&P 500…?)
(Additional context: In an era of narrative conflicts, is volatility the true asset?)
Table of Contents
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- What are retail investors doing vs. what are institutions doing
- How does the market move after geopolitical conflicts erupt?
- Why is this Iran situation particularly critical
- The three stages of each conflict
- Which sectors are actually receiving capital flow?
- What should you do now?
News about the US-Iran conflict is flooding in. If you’re wondering whether there’s profit potential in this conflict—there is. Felix Prehn, a former investment banker who specialized in studying “event-driven opportunities”—the financial language for war-related opportunities—found that from the Gulf War, Iraq War, to Russia-Ukraine War, each major military conflict follows the same three-stage market pattern, which determines the flow of institutional funds.
And this time, the US-Iran conflict is following the exact same script.
What are retail investors doing vs. what are institutions doing
When conflict erupts, retail investor behavior generally falls into three categories:
- Moving all assets into cash—thinking it’s safe, but actually just ensuring they are slowly eroded by inflation;
- Sitting passively in front of screens—watching their accounts turn red and being unable to act;
- Or rushing to buy assets that have just skyrocketed—oil, defense stocks, gold—entering at the worst possible time driven by fear but without a plan.
What about large institutions managing hundreds of billions? They do none of these. Instead, they rely on decades of research into conflict patterns, not emotion.
How does the market move after geopolitical conflicts erupt?
Historical data clearly shows: in the first 10 days after a geopolitical conflict, the S&P 500 typically drops 5% to 7%. About 35 days later, it recovers to pre-conflict levels. After 12 months, it rises by 8% to 10%—roughly the average return of a normal year.
Real-world examples support this: During the Gulf War, the S&P had an annualized return of 11.7%, and the next year, it gained another 18%. During the Iraq War in 2003, the market rose 13.6% within three months. After the Russia-Ukraine war started in 2022, the S&P initially fell 7%, then rebounded above pre-war levels within months.
The conclusion is clear: wars rarely destroy markets outright. They create uncertainty, which causes declines, but also opportunities.
Why is this Iran situation particularly critical
Iran produces 3.3 million barrels of oil daily. Any escalation—perceived or real—raises supply risk, which propagates along the supply chain.
Markets don’t wait for actual supply disruptions; they price in the probability of disruption in advance. Oil is a key input for nearly all production activities—transportation, manufacturing, shipping, food, fertilizers, heating and cooling. Rising oil prices increase costs across the board, fueling inflation; persistent inflation makes it hard for the Fed to cut rates; high interest rates make mortgages, car loans, and corporate financing more expensive; higher financing costs squeeze corporate profits, leading to lower stock valuations.
A clear transmission chain: Oil prices → Inflation → Interest rates → Valuations.
The three stages of each conflict
Every geopolitical conflict drives capital through three distinct phases. Understanding which phase you’re in can fundamentally change what actions you should take.
Stage 1: Shock
Arrives suddenly and fiercely, driven by emotion and algorithms. Oil prices spike, VIX (fear index) surges, risk assets plummet—biotech, high-growth tech, speculative stocks are sold off as funds flock to safe havens, with gold rising in tandem. Financial media enter 24/7 coverage, aiming to maximize panic.
This phase lasts days to weeks. If you chase into oil, gold, or defense stocks during this time, you’re almost certainly buying at the top. Impulsive actions are most costly here.
Stage 2: Repricing
Panic subsides, markets shift from “feeling” to “thinking.” The question changes from “what just happened” to “what’s next”—is this a temporary shock or a structural shift? Will inflation stay sticky? How will the Fed respond? Are supply chains permanently broken or just under short-term pressure?
Institutions reposition during this phase. Not in the chaos of the first days, but in the clarity that emerges afterward. Smart money profits from the calm after the storm, not during the storm.
Stage 3: Rotation
Funds withdraw from impacted sectors and flow into areas that benefit from the new landscape.
Which sectors are actually receiving capital flow?
Energy—but not what you might think
Short-term, oil outperforms the market. A study by US banks on the 1990 geopolitical shocks shows oil as the best-performing asset class, with an average gain of 18%. But the real winners are companies that can collect “tolls” regardless of oil price direction—pipelines, storage terminals, energy infrastructure.
Defense—look at structural orders, not headlines
Defense stocks spike immediately during shocks, with some up over 30% since tensions escalated. But defense spending isn’t a one-quarter event—governments sign multi-year procurement contracts, with large contractors holding billions in backlog. The key is to invest in companies with multi-year spending cycles.
Gold and Silver—longer-term allocations
Gold surges in the first phase but often stays high without returning to previous lows. Bank of America data shows that six months after a shock, gold still outperforms by an average of 19%. The underlying drivers—higher inflation, central bank money printing, institutional safe-haven demand—don’t disappear with headlines. If conflicts drag on, oil remains high, and inflation stays sticky, the Fed can’t cut rates, creating a strong environment for gold.
Companies with pricing power
This is often overlooked. If inflation remains high long-term, you want companies that can pass higher costs onto customers—strong brands, high margins, lacking cheap substitutes. Utilities and real estate tend to underperform in such environments because sustained high rates compress their valuations.
What should you do now?
Don’t panic sell. Decades of conflict data point to the same conclusion: selling during the initial shock locks in losses and causes you to miss the rebound. Don’t chase assets already making headlines—if you’re learning about them from news, you’re already late.
Keep core holdings steady—those with strong brands, high margins, and pricing power. Then review your portfolio: which assets are most vulnerable in the current environment? Where is institutional capital flowing that you haven’t yet positioned for?
What you need is a disciplined tilt—reallocating your portfolio toward sectors where institutional money is already moving, before the headlines catch up.
This article is for informational purposes only and does not constitute investment advice. Cryptocurrency markets are highly volatile; please assess risks carefully before investing.
