With the outbreak of war in Ukraine, my heart goes out to all the Ukrainians and their relatives and friends around the world. War is a terrible thing, and the needless suffering of innocent people is heartbreaking. That said, during tumultuous times, people often wonder how their personal finances may be affected. This may seem callous, but it’s a perfectly natural reaction to wonder how global events may more directly affect you. There are differing prevailing views on how the U.S. stock market may be affected by war. Some think that since war is a devastating occurrence, that the market should naturally fall to match the negative worldwide mood. Others, particularly those in favor of war and cynics of human behavior, expect the market to rise in the event of war as people profit off human suffering. Both sides are surprised (and often dismayed) when markets do not match their expectations, but this is often the case. Markets are forward-looking but also reactive to news events. How the market will perform at any given time is very difficult to predict. For that reason, I took a historical approach to investigate how the S&P Composite index has performed during previous wars in order to give us some sense of what to expect from present and future conflicts.
To examine this issue, I generated graphs displaying the price of the S&P Composite/S&P 500 index during the following wars: World War I, World War II, the Korean War, the Vietnam War, the War in Afghanistan, and the Iraq War. War start and end dates and dates of U.S. military involvement were obtained from Wikipedia. A period of 5 years before and after each war are included for context. S&P Composite data was obtained from Dr. Robert Shiller. You can access this data along with details of how the data was collected here. I used inflation-adjusted monthly prices which do not include dividend reinvestment. It is important to account for inflation because this has a direct effect on purchasing power. You can read more about inflation here. In brief, stock market gains may be reduced by the effects of inflation, and stock market losses may be exacerbated. This is especially relevant in the case of war, as war is known to often result in increased inflation.
World War I
World War I began in July 1914 and lasted until November 1918. The U.S. joined the war in April 1917. Here is how the S&P Composite performed during the war:
As you can see, stock prices had been trending down during the 5 years preceding World War I. There was an initial increase in stock prices following the start of the war, with the S&P Composite rising 20% over the first 1.5 years to a high in December 1915. The stock market then began to decline, with this decline intensifying after the U.S. joined the war. By the end of the war, the market had fallen 46% from the high over 3 years, with a 32% reduction occurring after the U.S. joined. Following the end of the war, the market stabilized over the next 5 years. Overall, despite the large swings during the war, the market appeared to be mostly continuing the downward trend that was occurring before the war began.
World War II
World War II began in September 1939 and lasted 6 years until September 1945. The U.S. joined the war in December 1941.
Prior to World War II, there was a 109% run-up in the stock market from March 1935 to February 1937, followed by a 46% crash to a low in April 1938. This was followed by a brief recovery. However, after the war started in September 1939, the stock market declined another 46% to a low in May 1942. This turned around shortly after the U.S. joined the war, with stocks rallying 80% by the end of the war. This rally continued post-war until a high in April 1946, with a total gain of 108% from the low over 4 years, followed by a quick 32% drop and price stabilization. Overall, there was essentially no change in inflation-adjusted price from 1934 to 1939.
The Korean War
The Korean War began in June 1950 and continued until an armistice agreement was signed in July 1953. The U.S. joined the war in July 1950.
Stock prices were mostly stagnant prior to the start of the Korean War. During the war, the market rose slightly for a total gain of 15% over 3 years. Following the end of the war, the stock market rise accelerated, gaining 97% to a high in April 1956 before a brief pullback. Overall, the war did not appear to have much of an effect on the U.S. stock market.
The Vietnam War
The Vietnam War began in November 1955 and lasted until April 1975. The U.S. joined the ground war in March 1965 and had withdrawn all personnel by March 1973.
The Vietnam War began soon after the Korean War reached its end, and the rise in stock prices continued throughout much of the war. From the onset of the war until the U.S. joined about 10 years later, the market was up 66%. Stock prices stagnated after the U.S. joined, falling 6% over the 8 years the U.S. was involved. Following the U.S. withdrawal, the market crashed 50% to a low in December 1974, just 1.75 years later. Prices then stabilized following the end of the war. Overall, the war period appeared volatile but not out of the ordinary for the stock market.
The War in Afghanistan
The War in Afghanistan was the longest war in U.S. history, lasting from October 2001 to August 2021.
The War in Afghanistan took place following the dot-com bubble burst and 9/11. The war itself lasted most of the last 20 years, which includes the market stagnation of the early 2000s, the Great Recession, and the subsequent run-up in stock prices. From the beginning of the war until its end, the market rose 169%. The war itself did not appear to affect overall stock prices.
The Iraq War
The Iraq War began in March 2003 and ended in December 2011.
The Iraq War occurred shortly after the War in Afghanistan began and ended 10 years sooner. During the first half of the war, stock prices rose 60% from a low in February 2003 to a high in October 2007. This was followed by a 52% crash to a low in March 2009 during the Great Recession. From there, stock prices partially recovered by the end of the war and continued to increase following the end of the war. Overall, the market was mostly flat during this war, gaining a total of 20% over 8 years.
As we’ve seen, historically the stock market does not perform in any one particular way in the event of war. Both gains and losses during a war are common. From beginning to end of a war, we have seen an overall decline during WWI, stagnation during WWII and the Vietnam War, a slight increase during the Korean War and the Iraq War, and a greater increase during the War in Afghanistan.
There does appear to be more of a correlation between times the U.S. is militarily involved in wars and increasing stock market prices, with the counter examples of WWI and the Vietnam War. This may perhaps be a result of the American people feeling more in control or optimistic about what happens during a war when their country is more directly involved. Even in the case of the Vietnam War, when prices were mostly stagnant while the U.S. was involved, falling only slightly during that period, the market dropped drastically once the U.S. withdrew, suggesting that market sentiment may have been higher while the U.S. had more direct involvement.
I have heard people say that the stock market tends to fall prior to the outbreak of war because the market is forward-looking and prices in the potential for war. You can see that prices indeed fell prior to all the wars I examined with the exception of the Vietnam War. However, this is complicated by the decline prior to WWI being part of a longer trend and rallies immediately prior to WWII and the Korean War. It is also possible that wars are more likely to break out when global economic conditions decline, since this increases tensions and changes political calculations. For these reasons, it is difficult to say whether the stock market is truly anticipating war.
Overall, it seems to me that the stock market is not largely affected by war. Trends in the market present prior to war appear to continue both during and after war. There are rises and falls in the short term, but it is hard to say whether these are directly caused by war or by other factors either not related or more indirectly related to these conflicts. With a long-term view of the market, it seems like war has little impact. For long-term investors, therefore, it is not worth worrying about the effect of war on your portfolio. You are free to worry instead about the lives being destroyed and to help in whatever way you can.