How The Stock Market Reacted During Past Wars

On 7 October 2023, the Palestinian militant group Hamas made a surprise attack on Israel, igniting the 2023 Israel-Hamas war. As of now, it’s anyone’s guess how long this war is going to last, the number of casualties and deaths that will be recorded, and the economic and social effect it will have on the various cities and people where fighting and bombing are currently taking place.

From an investor point of view, one observation would be to see how stock markets tend to react to these events, especially since nobody, including the Israeli intelligence community, predicted the attack. This makes the market’s immediate reaction a good proxy for what the financial industry thinks about how war could affect their investments.

As 7 October was a Saturday, the market was closed. On 9 October Monday, the S&P 500 went up marginally from 4,308 to 4,335. The Nasdaq-100 saw a similar trend, closing slightly up from 14,973 (7 Oct) to 15,074 (9 Oct). So while the world was reeling in shock from the attack, investors and fund managers were not so worried, at least not for their investment portfolio.

Just how often does the stock market typically shrug off the shock of war? And could war, as horrible as it is, actually end up being a good thing for the markets?

The Ukraine-Russia War

It’s been about 20 months since Ukraine was invaded by Russia in February 2022. Unfortunately, the war is still ongoing and is a stark reminder for anyone hoping for a quick resolution in Israel, that wars can take years before they are over.

During the first three weeks of the Ukraine-Russia war, the S&P 500 index fell from 4,225.50 (23 February) to 4,173.11 (14 March), or down just 1.2% during the initial period of the war. It then recovered and traded at a higher level until later in the year when the US Fed started raising interest rates to curb inflation.

9/11 & The U.S. War In Afghanistan

On 9/11, both the NYSE and Nasdaq were closed for four trading days (Tuesday to Friday). When it reopened for trading on the Monday after the attack, the S&P 500 fell by 4.9% on the day and declined 11.6% for the week.

While significant, such a decline isn’t as massive as the decline observed in other crises, such as the S&P 500 declining by about 33% in a period of one month from February to March 2020 due to COVID-19, the 2007/2008 Global Financial Crisis or Black Monday in October 1987.

It’s also worth pointing out that during the U.S. invasion of Afghanistan from 7 October 2001 to 17 December 2001, the S&P 500 went up from 1,071 (5 October) to 1,144 (21 December 2001).

World War II

The Dow Jones Average, a stock market index of 30 prominent companies listed on stock exchanges in the United States, did stumble during the earlier days of World War II but recovered around 1942 and performed well thereafter.

So even while wars were being fought on different fronts, the stock market appeared to be able to take its own view of what was happening.

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Wars Do Have A Short-Term Effect On Prices

We should not assume that wars have no effect on the stock market.

According to data compiled by LPL Research, the most significant geopolitical events including wars and other attacks tend to have a slight negative impact on the stock market (represented by the S&P 500). In some cases, such as the assassination of John F Kennedy, the market suffered only a single-day decline before recovering the next day.

On other occasions, such as when Pearl Harbour was attacked which led to the U.S. entering World War II, it took a longer time of about 10 months before the stock market recovered.

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Obviously, none of us can predict these events. However, what we can control is how we react to these major events. Do we fight (invest more), run (sell off our investments), or just ignore it (status quo)?

Data compiled by LPL Research shows us that while there is a mix of positive and negative returns one month after these major events (including wars), there are significantly more positive results 12 months after the events.

In fact, most of the negative returns that are recorded 12 months after the major events also tend to coincide with the economy being at a near-recession prior to the major event occurring in the first place.

To summarise our observations, we can see that while war is a horrible tragedy that nobody wants, the financial markets, being rational and unemotional, do not seem to react unnecessarily to it.

And while the loss of lives is tragic, it also tends to push governments to increase their spending on essential items and this could ultimately benefit and create positive effects for some companies that have their stocks listed on the exchanges.

Read Also: Can Gold Really Be A Safe Haven During Times Of Crisis? We Take A Look At Gold Prices During Periods Of Uncertainties To Find Out If There Is A Co-relation?

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