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Analyzing U.S. Stock Market Performance Through the Tumultuous Waters of War: What History Reveals Thumbnail

Analyzing U.S. Stock Market Performance Through the Tumultuous Waters of War: What History Reveals

Echoes of wartime crises characterized by geopolitical strife and global upheaval have consistently tested nations and their citizens throughout history, demanding unyielding fortitude in the face of adversity. In the midst of war, frankly, it seems a bit callous to be talking about investment portfolios at all. Yet, even in such turbulent periods, it is crucial to understand how this might impact you and your financial well-being. In considering the historic impact of major conflicts throughout the 20th and 21st centuries, the U.S. stock market's reaction can vary based on the unique circumstances surrounding each conflict. In this article, we'll explore the connection between wartime situations and how they influence stock market dynamics, shedding light on what this could mean for you in your every day life. 

Market Behavior During Geopolitical Crises

First, let's look at insights from a study by Bill Stone, Chief Investment Officer at Glenview Trust Co., who examined market behavior during geopolitical crises. Stone analyzed 29 such crises dating back to World War I. On average, he found that stocks tended to be higher three months after a geopolitical shock, with 66% of events showing higher stock prices just one month after the crisis. There were, however, outliers, such as the closure of the New York Stock Exchange during World War I, leading to a drop in stock prices when it reopened.

A similar situation occurred after the 9/11 attacks, where the financial markets remained closed until September 17, and the S&P 500 fell by almost 5% in a single day. On the first day of NYSE trading after Sept. 11, the Dow Jones fell 684 points, a 7.1% decline, setting a record at the time for the biggest loss in the exchange's history for one trading day. The close of trading that Friday ended a week that saw the biggest losses in NYSE history. The Dow Jones Average was down more than 14%, the S&P 500 Index plunged 11.6%, and the Nasdaq dropped 16%. In the years since Sept. 11, the S&P 500 index has risen nearly four-fold despite periods of steep declines, including the 2007-2008 financial crisis. Stone emphasizes that the likelihood of stocks being higher increases as time passes after the crisis, and sometimes, stocks rebound significantly after a crisis, making it costly to exit the market prematurely.

U.S. Stock Market During War Times

Historically speaking, U.S. markets have often demonstrated resilience during conflicts related to the Middle East and Iran. However, a broader conflict could have implications for oil and commodities. Mark Armbruster, President of Armbruster Capital Management, examined market data from 1926 through July 2013 and discovered that stock market volatility generally tended to be lower during wartime. He noted that despite expectations of geopolitical uncertainty impacting the stock market, this has not consistently been the case, except during the Gulf War when volatility aligned with historic averages.

Now, let's delve into specific conflicts and their impact on the stock market. The below chart shows the annual percentage change of the S&P 500 index back to 1927 (click chart for details). Performance is calculated as the % change from the last trading day of each year from the last trading day of the previous year. The current price of the S&P 500 as of October 20, 2023 is 4,224.16.

Below is a chart of the Dow Jones Industrial Average (DJIA) stock market index for the last 100 years (click chart for details). Historic data is inflation-adjusted using the headline CPI and each data point represents the month-end closing value. The current month is updated on an hourly basis with today's latest value. The current price of the Dow Jones Industrial Average as of October 20, 2023 is 33,127.28.

World War I (1914-1918)

The stock market initially experienced significant declines during World War I. Stocks fell around 30% at the outbreak of WWI and markets were closed for several months. When they reopened, the Dow rose more than 80% in 1915. The Dow Jones Industrial Average fell by about 32% from 1916 to 1917. However, stocks rebounded after the war ended, marking the onset of the Roaring Twenties.

World War II (1939-1945)

The stock market initially declined with the outbreak of World War II but recovered during the course of the war. The stock market actually rose just after Hitler invaded Poland. After the Japanese attack on Pearl Harbor occurred, stocks fell 2.9% but regained those losses in less than a month. From 1939 until the end of the war in late 1945, the Dow saw increases of 50%. After the war, the Dow Jones Industrial Average experienced a robust rally, reflecting the post-war economic boom.

Korean War (1950-1953)

The Korean War saw some market volatility but did not lead to a prolonged bear market. Stocks mainly traded within a range, and the market eventually resumed its post-World War II rally.

Vietnam War (1955-1975)

The Vietnam War era was marked by market turbulence, often coinciding with other economic factors, such as inflation and the 1970s oil crisis.

Gulf War (1990-1991)

The stock market exhibited some uncertainty and short-term declines leading up to and during the Gulf War. However, the conflict was relatively brief, and the market recovered soon afterward.

Iraq (2003-2011) and Afghanistan Wars (2001-2021)

Market performance during this period was influenced by various factors, including the bursting of the dot-com bubble and the global financial crisis in 2008.

Investing During War?

It's crucial to remember that the U.S. stock market's performance during times of war is shaped by a multitude of factors, including a conflict's duration, scale, the state of the economy, and other co-occurring geopolitical events.  In general,  as expected, defense stocks (companies that produce weapons and armaments) tend to fare the best during an immediate wartime crises environment. Energy companies may also see a boost in conflicts that result in higher oil and commodity prices.

3 Rules of Thumb To Remember

1. Set (and STICK TO) your goals

Every account has a purpose. If you lose 20% of your portfolio’s value in a year where markets drop by 40%, non-goals-based investing would mean that ANY loss is intolerable and you're likely to sell at a loss—even if you’ve actually beat the markets. For example, in 2020, the coronavirus pandemic sent the world into a recession and equity markets reeling as the S&P 500 plummeted by 34%. The S&P bounced back in the second half of 2020 and reached several all-time highs in 2021. If you sold everything in a panic, you locked in losses forever, and now you've probably had cash sitting since 2020, getting slowly dissolved by inflation and the rising cost of living. A goals-based approach would be more accepting of a short-term loss, so long as you’re still on track to save for retirement and other financial milestones.

2. You can't avoid risk, so learn how to effectively manage it

Every investment comes with some amount of risk, even cash. If everything is in cash, you're not outpacing inflation right now, which means your dollar will buy you far less in ten years than it does now. If everything is invested, you aren't keeping enough set aside for emergencies and near term expenses. This is where working with a certified financial planner can come in handy to help you mitigate risks, given the purpose of the funds invested and your timeline for needing income. 

3. Avoid Impulsive Decision-Making: Slow & Steady

A 30 year old who has an investment account of $1000 would need to save $6,357 a year, increase that savings by 5% a year, and get an average 8% return in order to be a millionaire by age 60. To give you an idea of income on a million dollar account, if you have a relatively safe withdrawal rate of, lets say, 3% in retirement....That's 30k/year in income.

Now consider that a million dollars today won't be worth the same in 30 years. One million adjusted for inflation of 3% will be roughly $2,427,262 in 30 years. Meaning, the rising cost of goods and services will impact how much and for how long you need to save. So, that same person will need to save approximately $15,486 a year (indexed at 5%) to reach the same quality of life/income goal by age 60. If the SAME person WAITS until they're 40 to start investing, they will need to save approximately $29,963 annually (indexed at 5.0%) to reach that goal by age 60.

TIME and consistency are KEY.

And, frankly, a lot easier to manage for the average person than trying to predict day to day market swings, anticipate global impacts of geopolitical events, or find success day trading with the next over-publicized/overrated meme stock.

Questions? Reach out.

  • https://www.macrotrends.net/2526/sp-500-historical-annual-returns
  • https://www.macrotrends.net/2324/sp-500-historical-chart-data

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.