The question of what happens to the stock market during a war is often asked in times of geopolitical conflict. In this blog we’ll discuss:
- The historical data behind stock market performance during wars
- How markets react to war
- Whether or not stocks go down during war
- How to preserve your wealth during a war
What happens to the stock market during war (generally)
Before we get into the numbers, here are some general themes regarding how war impacts the stock market.
- War does tend to benefit the economy, because of higher demand for more equipment and goods from the government. This leads prices to go up and we often see inflation as the result.
- Wars are often not a surprise as tensions mount over time. By the time forces engage, the market has already priced it in.
- It is useful to note that a war is a period in time, and each period in time has varying factors that are in play. No two historical time periods are exactly alike. No two wars are exactly alike.
The influence of war on the stock market may be greater or smaller depending upon the economic, societal, and political factors that are present during those episodes. Let’s say a country were in a recession at the time the war started. This would be a completely different backdrop from a thriving economy with an overvalued market.
Also consider the role that technology may play in changing the nature of war. Social media, for example, may play a larger role in the war due to the sociopolitical implications it may have. It didn’t exist during World War II.
For all these reasons, we tend to view the analysis of what the stock market does during times of war as full of as many questions as answers. A cursory view such as ours wouldn’t yield outcomes meaningful enough to base any actions upon. For that reason, we encourage anyone with questions regarding their portfolio and the possible impact of war on it to contact their financial advisor.
How the stock market performs during war years: what history says
The following chart from Mark Ambruster captures stock market performance during times of war (World War II, the Vietnam War, etc.)
Source: Mark Armbruster, "What Happens to the Market if America Goes to War?" CFA Institute Blog, 2017
As you can see, there’s no real evidence of a substantiated decline for most of the time periods studied.
This graph from LPL echoes this sentiment. In most cases, a geopolitical shock event is followed by a recovery in three or fewer months, in all cases but two.
Do stocks go down during war: the (not so) bottom line
It is never possible to predict the performance of any investment, and this holds true for trying to forecast how the markets react to war. However, in studying the history of what happens to the stock market in times of war, it appears that stocks have not gone down significantly during a war.
The bottom line: Historical data aside, wars are uncertain times, and there is never any guarantee that stocks will or will not go down during a war.
Which leads us to the next question – what does a war mean for investors? How do you invest during a war?
Let’s find out.
What this means for investors
As financial advisors in Philadelphia serving clients across the country, we urge investors to take a long term approach that is focused on matching their proper risk tolerance with their investment portfolio. Market fluctuations should not dictate what investments you make, because there is no way to predict the market, and in the long term the best way to achieve your investment goals is to align your portfolio with your risk.
How to preserve wealth during a war
Any time that there is excessive market volatility, it is important to remember sequence of returns risk. This is especially pertinent for those approaching or at retirement.
Sequence of returns risk is the concept that a portfolio, once it declines, has to recover more than the declined amount in percentage terms to return to its original level.
For example:
- You have $1,000,000 in the stock market. It goes down 15%. You now have $850,000.
- You need to gain back more than 15% on that $850,000 to get back to the $1,000,000 you started with. Your portfolio now needs to rise 17.64%.
Let’s say that you are retired and taking a 6% distribution from your portfolio at the same time as the market is going down. This compounds the portfolio decline.
The best way to preserve wealth during a war is to ensure that your risk tolerance is fitting to your personal circ*mstances. Your financial advisor should have conducted a risk tolerance assessment, and it should be updated as needed, whether you have a change in life position or in your willingness to take risk.
Summary on what happens to the stock market during a war
We hope our explanation on what happens to the stock market during a war was helpful. Prudent investing is especially important in times of geopolitical instability.
We are afiduciary financial advisor in the Philadelphia area, but we work with clients across the country. We provide fee-only, objective advice to our clients on taxes, wealth management, and financial planning. If you would like to discuss a possible relationship,contact us.
Sources
Ambruster, Mark, CFA. (August 29th, 2017) CFA Institute, Enterprising Investor Bkig. What Happens to the Market if America Goes to War? Retrieved on March 1st, 2022 from here.
LPL Research. Market Blog. How stock do during geopolitical events. Retrieved on March 1st, 2022 from here.
