Wars and conflicts affect the entire world to some degree. Historically, there were many wars that ended the lives of innocent people and changed others. But one thing that we do not always think of when it comes to war is how it affects the stock market. Whether you want to focus on stock trading exclusively or you are also searching for forex brokers accepting U.S. clients in 2023, you may want to know how such a huge event can affect the stock market.
Now that Ukraine and Russia have been at war for over a year, people are curious about the impact on the market. In this article, we will take a look at how wars affected the stock market throughout the years.
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How Is the Stock Market Affected by Wars?
Although war can affect the stock market, statistics show that the drawdown is not as high as one would think. Research has taken a look at the performance of stocks from the day the event started or from the day it became known to the public.
The results show that the drawdown is not too high, and it usually takes less than a year for a recovery to be complete. So, if a war ever begins and you are wondering when you should buy stocks, you should probably do it shortly after you learn about the conflict.
Did WW2 Affect the Stock Market?
We can tell a lot about the performance of the stock market during wars by taking a look at the situation during WW2. In 2008, Barton Biggs, a known stock market strategist, wrote the Wealth, War & Wisdom book. This is where he published a chart that reveals how Dow Jones performed during this historical war.
The stock market dropped almost 20% when Pearl Harbor was hit by the first bombs. This wasn’t a permanent change, though. A few months after the Japanese attack, the bottom was set. Then, Dow Jones went past 60% again before the war ended and before the Japanese and the Germans surrendered.
In 1941, the United States entered the war. There was a stock market drawdown before this, as it was probably expected for the U.S. to be dragged into the war. However, the performance was pretty good in 1942, as well as the first half of 1943.
A chart that looks at the performance during the 1990 Iraqi invasion of Kuwait shows that the first reaction was to sell off at decreased prices. It did not take long for the market to recover, though – the invasion began in August, and by October, the market had discounted the war completely. Then, the stock market was able to rise when the Iraqi army was forced to leave Kuwait by the U.S. forces.
Many of the Wars Did Not Happen in the U.S.
Many wars, such as WW2, did not take place in the United Space. So, all the destruction and damage to infrastructure happened in Germany and the rest of Europe. Then, when it comes to the Russia and Ukraine conflict, Ukraine was the one taking most of the damage and destruction. Not to mention that the Russian economy ended up in a bad place following the invasion.
As such, the United States was safe from any damage and ruins, which could be another reason why the stock market did not take such a huge blow in the United States.
Decreased Volatility
The fact that there isn’t a much worse reaction of the stock market during a war is quite curious. But a study revealed that volatility decreases during wars.
Angela Vossmeyer, Marc Weidenmier, and Gustavo Coster released a study named Stock Volatility and the War Puzzle. In this, the three looked at how U.S. stocks performed between 1890 and 2017, particularly during times of war.
They discovered that there is lower volatility in times of conflict and war compared to times when the world is experiencing no geopolitical issues. According to the authors of the study, this could all be a result of government spending.
The Bottom Line
The stock market can drop when a war begins, but these effects are generally temporary. Things can change significantly before the war even ends.
The uncertainty regarding companies’ future probability is decreased as conflicts lead to huge military spending. For the most part, conflicts and wars are discounted either before they begin or during the initial part of the war, and later, the market will start to grow once more.
