The reason for the market crash

Why the stock market is selling off and what you can do about it

Honestly, I had a different post planned for today. But the state of the economy and the sharp selloff in the stock market made me change my mind. A lot of people are watching their profits vanish in a matter of hours. They are not ready for it, and they’re panicking. The news is as bad as we have seen in a long time.

While we are seeing a market crash, this isn’t a random event. It’s the result of a specific trifecta of forces that has been building for weeks:

1. The war in the Middle East

2. The sudden block of global oil routes

3. The heavy weight of a midterm election year.

These factors have come together to create a storm that has left investors looking for the exit. Today, I’ll help you make sense of this mess. I want to show you what to expect and how to plan for the months ahead. Now is not the time to make mistakes. Whenever you’re concerned about the future, you need to look at the past to spot rhythms and patterns that predictably play out, so that you can align with the market rather than going against it. It’s time to protect what you have by understanding the data that the rest of the world is ignoring.

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The Mechanics of the Current Decline

To understand why your portfolio is red, we have to look at the three gears turning behind the scenes. The first gear is the direct conflict. On February 28, 2026, the U.S. and Israel launched a joint attack on Iran. While the world watched the headlines, the market began to price in the risk of a wide war. Most people thought Iran would back down, but they have been fighting back with more gusto than expected.

How the Iran strike will hit the US economy

Iran hit back by targeting a crucial gear: the oil supply.

The Strait of Hormuz is a small passageway that handles 20% of the world’s oil. This is the most vital choke-point in the global economy. When Iran effectively blocked this route, it didn’t just raise the price of gas at the pump, but started a domino effect that raised the cost of everything. Crude oil, liquefied natural gas, and even fertilizer are getting more expensive to move. This creates a massive spike in the cost of production for almost every company in the S&P 500.

The third gear is the 2026 midterm cycle. Markets hate uncertainty, and midterm years are the peak of political and economic doubt. Today, these three forces hit a breaking point. Evacuations are now happening in many countries, and the markets are starting to price in a war that could last a very long time.

While these three forces feel unique and scary, they are actually part of a much older pattern. To see where the market is going, we have to look at how it reacted when the world was ending in the past.

To stay ahead of these market shifts and get these weekly deep dives delivered to your inbox, subscribe for free and join 39,000+ smart investors:

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A history of dips and rebounds

History shows us that the market is a machine designed to survive chaos. This is typically how the market goes:

Take the year 1907. The stock market dropped 50% after the San Francisco earthquake. People panicked and pulled their gold out of banks. That crash was so bad it led to the birth of the Federal Reserve. But shortly after that 50% drop, the market surged 193% over the next four years.

This pattern of pain followed by gains is a constant.

• In 1929, the issue was loose lending. Everyone was borrowing money to buy stocks. When the market topped out, the panic was so great that the market fell 83% over nearly three years. Unemployment hit 25%. It took 20 years to fully recover, but once it did, the market saw a gain of 815% over the next 14 years as the economy rebuilt itself after the war.

• We saw this again in 1973. President Nixon took the U.S. off the Gold Standard. Inflation went wild, and the Fed hiked rates to stop it. The market lost 40% of its value. Yet, over the next 13 years, the market climbed 845%.

• Even the most famous one day crash, Black Monday in 1987, saw stocks fall 22%. That drop was short lived, and the market went on a 13 year run that gained 800%.

The lesson here is simple. Every time the world seems to fall apart, the market eventually finds its footing and reaches new highs. Whether it was the Dot Com bubble in 2001, the Great Recession in 2008, or the 30% COVID crash in 2020, the result was the same. Most recently, the Tariff Scare of April 2025 caused massive losses, yet the market has grown 35% from that bottom.

If you want even more proof of how profitable the stock market is in the long term, take a look at this graph of the last 100 years:

Source: MacroTrends

Green signals years of profits, the red signals years of losses. Overall, there’s a lot more green than red. But, there are red years of 17%, 23%, 30% losses – and even 40% losses. Yet, after every single one of them, there was a year of profits. Typically, it’s multiple years of profits. If you panicked and sold, waiting for the bottom, you might just ened up missing out.

What is your plan for this selloff? Are you buying the dip, or are you waiting for more clarity? Let me know in the comments.

But history does not just tell us that things will get better eventually. It also tells us when they will get better. This brings us back to the specific timing of the 2026 cycle.

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The Midterm Trap and the 100% Signal

There is a reason why 2026 feels more volatile than last year. We are in a midterm year. Data shows that midterm years see the largest pullbacks in the entire presidential cycle. Since 1950, the average drop in a midterm year is 17.5%. In 2002, the market fell 33.8%. In 2022, it fell 25.4%.

Source: The Street

The conflict with Iran and the oil crisis are the triggers, but the midterm cycle is the structural reason for the depth of the drop. However, there is a silver lining that most people miss in the middle of a panic. One year after those midterm lows, the market has never been lower, even once in the last 76 years.

The average return in the 12 months after a midterm bottom is 31.7%.

In fact, 68% of the time, the one year returns after these pullbacks have been 30% or more. The person who sells today is betting against a 100% historical success rate of a recovery. Sure, you could say this time is different, but what justification do you have?

This leads us to a fundamental truth about investing. To win, you have to change the way you look at a red screen. You have to stop seeing a loss and start seeing an opportunity.

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The Grocery Store Rule: Why Staying Invested Wins

There is always a reason not to invest.

In 2009, it was the banks.
In 2020, it was a virus.
In 2025, it was tariffs. Now, it’s war.

But for those who stay the course, the numbers do not lie. The S&P 500 is still up over 70% in the last five years, even with the recent drop.

The stock market is the only place where people run away when things go on sale. If you saw the price of a TV drop to $100, you would buy it in an instant. If the eggs you buy at the grocery store go on sale, you do not feel bad about the eggs you bought last week. You just stock up on more because you know you’ll need to eat next week.

Stocks are the same. Unless you need to cash out and retire in the next few months, what the market does today is purely noise. If you own a broad index like the S&P 500, your goal is to hold for decades. A 10% or 20% drop is just a Black Friday sale for your future self. History shows that for every year of red on the chart, there are multiple years of green to follow.

The biggest risk is not a market drop. The biggest risk is panic selling at the bottom and missing the 30% recovery that historically follows. You should view this as a test of your willpower. Keep your emergency fund full, live below your means, and stick to your plan.

The tried and true method for a century has been to buy and hold for 20 to 30 years. As long as you stay in the game, nothing has fundamentally changed.

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Friend of the newsletter

In January, I announced referral rewards for sharing this newsletter with your friends. One reader earned the “Board Member” reward by bringing in 15 new readers!

Kyle Vallans writes the newsletter Market Bullets. In his words:

Market Bullets is a free daily newsletter from StockAnalysis.com that delivers the most important market news, earnings, and events in a quick bullet-point format before the open. It’s read by over 218,000 investors.

Thanks Kyle! Once we have five board members, we’ll be launching our Hall of Fame. If you’re sharing Graham’s Newsletter, there’s still time to make it on the board :)

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I’ll see you next week.

— Graham