How does a war affect the stockmarket?

“Buy to the sound of cannons, sell to the sound of trumpets.”

The above quote, presumably said by the famous banker Nathan Rothschild, is repeatedly quoted when a new conflict pops up. Is it any truth in it? Let’s start by finding out how stocks have performed during conflicts and war.

We use the US stock market as a proxy because the US has long datasets. However, keep in mind that the US has not had a war on home soil for a very long time. Luckily, many have researched the performance before. For example, LPL Research conducted a thorough backtest in 2020:

The Impact of War on Stock Market Performance
The Impact of War on Stock Market Performance

The table measures the performance from the day the conflict started or became public knowledge. As you can see, the drawdown is probably a lot less than you would imagine.

The second column to the right indicates that the bottom happen not long after the conflict started. Likewise, the days to recovery have always been less than a year (recovery is the same level when the conflict started).

This is an indication it might be a good idea to buy not long after you hear the sound of cannons.

The famous stock market strategist Barton Biggs wrote a book in 2008 called Wealth, War & Wisdom. In the book Biggs published a very interesting chart showing the performance of Dow Jones during WW2:

How War Affects the Stock Market

When the first bombs landed at Pearl Harbor, the stock market initially fell almost 20%. However, the setback was temporary as the bottom was set just a few months after the Japanese attack.

Before the end of the war, the Dow Jones rose over 60% before the Germans and the Japanese surrendered (in real returns). If we look at the S&P 500 we find these monthly returns from 1941 to the end of 1945 (S&P 500 didn’t exist at the time but it has been constructed retrospectively):

Stock Market Reactions to War
Stock Market Reactions to War

For clarification: The US joined the war in December 1941. Prior to this, the stock market had a drawdown, probably in anticipation of the US being dragged into the conflict, but clearly had a solid performance in 1942 and the first half of 1943. The source is

Let’s look at another anecdotal evidence: the Iraqi invasion of Kuwait on the 2nd of August 1990:

How Do Conflicts and War Affect Stocks
How Do Conflicts and War Affect Stocks

The initial reaction was a selloff at lower prices, but already in October, the market had fully discounted a war. When the US forces forced the Iraqi army out of Kuwait, the stock market rose sharply.

Why doesn’t the stock market react worse to a war? Most likely because the governments start printing money or reshuffle money to create more activity. This brings us to another study:

How does war affect the stock market? Volatility goes down

In a recent study called Stock Volatility And The War Puzzle, Gustavo Cortes, Angela Vossmeyer, and Marc Weidenmier looked into the performance of US stocks from 1890 to 2017. The authors are mainly interested in the war periods, but the whole period was used as a benchmark. Perhaps surprisingly, periods of war and conflict have LESS volatility than periods of less geopolitical problems:

wars and conflicts and volatility
wars and conflicts and volatility

How come periods of wars and conflicts show less volatility? The authors believe it boils down to government spending: The figure above shows the relationship between defense expenditures to total expenditures (the blue line) and stock market volatility (the grey line).

Visually, it indicates an inverse relationship where higher defense expenditures are associated with lower volatility. The authors calculated the correlation to a negative 0.26.

How does war affect the stock market? Extinction

Keep in mind that none of the wars covered above were fought on US soil. This, of course, spares the US from damage or destruction of infrastructure. Germany lay in ruins after WW2 and the stock market was closed for several years. When it opened in 1945, it opened 90% lower to our knowledge.

Likewise, the Russian invasion of Ukraine has created havoc on the Russian economy and the stock exchange is still closed as of writing (but Western investors have lost more or less everything). We expect Russia to nationalize everything sooner or later. Also, the Russian stock market presumably performed just as well as the US stock market up until 1917, when it closed and never opened until 1991. And, of course, investors lost it all if they were still alive 74 years later.

How does war affect other assets?

There are many other asset classes than stocks.

Gold, for example, is perceived as a safe haven in times of turbulence. After the US terminated the convertibility of the US dollar to gold in 1971, we have witnessed a rise in the gold price when uncertainty picked up.It happened during the Iran revolution, Iraq’s invasion of Kuwait, and the beginning of the war in Iraq in 2003. However, as pointed out in this article, the gold price might react to anticipated money printing.

Gold has served as a useful inflation hedge for several thousand years, and wars often lead to a rise in the money supply, which eventually means higher consumer prices. Commodities also tend to go up because business and supply chains get disrupted. Oil, for example, has “always” risen when the geopolitical landscape gets uncertain. But commodities are notoriously difficult to predict and have shown poor long-term returns compared to stocks.


Massive military spending during conflicts and wars reduces uncertainty about the future profitability of companies. Any war or conflict is often discounted beforehand or during the first stage of the war, for later to rise.

Perhaps counterintuitively, forecasting might become easier despite geopolitical wars! However, we must separate wars fought on home or foreign soil. Forecasting is immensely difficult, but the aggregate of the market might be the best indication we have.

The markets are always looking ahead and rarely focus on what has happened. This is why it seems so counterintuitive when it goes up on presumably bad news. 

Article courtesy of Quantified Strategies.

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