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Russia attacked Ukraine on 24th Feb, 2022. This war has a possibility to become large if US and Nato forces join it at some point in time. The U.S has already spent $8 trillion on post-9/11 wars in 2022, which makes up a significant portion of its GDP. How does it affect the stock market and investors in general? This article shares details on some historical precedents regarding the effects on the stock market during the war and conflicting situations and preparing your investment for the worst. History of War Portfolio The largest historically downward trend in the stick market was when Nazi Germany's entered the Czechoslovakian nation in 1939 and attacked France in 1940. That's when the S&P 500 was down by 20.5% and 25.8% respectively. The market rose by 19% and 9.2% respectively after a year of these conflicts. S&P 500 dropped again during Pearl Harbor by 11% after the attack. The US declared war on Japan the day after, with Germany declaring war on the US and the US declaring war on Germany on the 11th of December. Again the market recovered by 15.3% one year later. Again during the oil crisis, the S&P 500 fell by 17%. However, it eventually recovered after the second world war. Historically speaking, at the start of WW2 in 1939 and its end in 1945, DOW was up by 50% and over 7% per year. Adding to the timelines of both wars, the US stock market grew by 115%. That means that the armed conflicts don't seriously impact US economic fundamentals of corporate profits. After the Russian invasion of Ukraine on Feb 24th, 2022, the global market fluctuated. The US stock market saw a decrease of 7% in the S&P 500 in the 7 days and weeks immediately after the incursion. As sanctions were placed on Russia, investors were concerned about the impact of commodity prices. However, a month later, the markets bounced back and S&P were traded at a level higher than before the invasion regardless of the increased oil price. This means that the stock market usually crashes during periods of uncertainty, and when there is a strong likelihood of a war. But the actual outbreak of a war increases the stocks value. This phenomenon is known as the war puzzle by the experts but they don't share any significant reason as to why it happens. These implications show that it is a good idea to buy quality stocks during a war at cheap prices and wait for the profitable return after the situation gets back to normal. It may sound odd but it's really true. Why the US Stock Market Stays Resilient during War? It could be due to the changing structure of global oil markets. The US economy has also become less vulnerable to the swings in energy pricing.
The conflict can cause volatile oil markets since Russia is a main producer of crude oil and natural gas and also feeds most of the European pipeline. However, shutting down a portion of that supply can lead to the increased energy prices. Interruptions at Black and baltic seas also lead to inflation in food as grains would be stuck at sea.
Why do Stock Markets not fall through Wars?
Wars indirectly benefit those economies that are not affected directly by the conflict. This happens by boosting the industrial production for meeting the military needs of countries engaged in battle. New technologies are developed and applied to the private sector due to the armed conflicts. The US stock market this way is able to shrug off the downturns predicted by the conflicts.
Which Stocks perform Best During a War?
Companies producing weapons (defense stocks) tend to do the best during warfare. Energy stocks also see a rise due to increased oil and commodity prices due to conflicts.
How the Stock Market Performed during the World Wars?
World War I: Stocks fell about 30% when WWI broke out. The markets were closed for half a year. However, when the markets reopened, the Dow rose more than 88% in 1915.
World War II: The stock market saw an increase of 10% right after Hitler invaded Poland in 1939. The stocks fell 2.9% when Japan attacked Pearl Harbor, however the losses were recovered in a month. From 1939 to 1945, the Dow saw a 50% increase.
Conclusion
Many people think that armed conflicts have a long-term negative for your investments and portfolio. However that is an incorrect assumption based on historical data and analysis. Whenever there is downtime in the market due to an armed conflict, the right thing is to buy and invest in quality stocks for a low price and wait for them to rise within a year or so to earn a handsome ROI.