What Happens to the Stock Market If We Go to War?

When geopolitical tensions escalate into armed conflict, financial markets often respond with immediate shifts. The relationship between war and market performance is not always straightforward. Understanding how these global events influence the economy and investment landscape is important for navigating uncertainty.

Immediate Market Reaction

The onset or escalation of a conflict triggers a rapid response across the stock market. Investors react to uncertainty by selling equities, leading to sharp declines in major indices. This behavior reflects an inclination to reduce risk when the future becomes less predictable.

During such times, a “flight to safety” occurs, where capital moves into assets perceived as more secure. Government bonds, particularly U.S. Treasuries, see increased demand as investors seek stability. Gold, a traditional safe haven, also appreciates, alongside certain stable currencies.

The market’s immediate reaction is characterized by increased volatility, reflecting investor anxiety. This fluctuation can be observed across market indices, including the S&P 500 and Dow Jones Industrial Average. Large-cap companies with stable operations might initially weather the storm better than speculative growth stocks. These short-term effects unfold over days to weeks following the event.

Historical Market Performance During Conflicts

Historically, stock market performance during conflicts has varied, depending on the conflict’s nature, scale, and duration. During World War II, the U.S. market dipped 2.9% after Pearl Harbor in 1941, but recovered within a month. The Dow Jones Industrial Average rose 50% from 1939 to the war’s conclusion in 1945.

The Korean War, beginning in 1950, saw the S&P 500 drop 12.9% at its onset, yet the Dow gained 144% from 1950 to 1955. Similarly, the Vietnam War, starting in 1955, saw the Dow rise 143% from 1955 to 1966, despite a 6.0% drop in the S&P 500 after the Tet Offensive. These examples illustrate that markets rebound even amidst prolonged engagements.

More recent conflicts also show a pattern of initial shock followed by recovery. The Persian Gulf War in 1990 led to a 16.9% correction in the S&P 500, which recovered quickly. In 2003, the Iraq War saw the S&P 500 fall 5.3% over seven trading days, but recovered within 16 days, with the DJIA rising 8.4% in the month following the invasion. The Russian invasion of Ukraine in 2022 caused the S&P 500 to fall over 7% initially, but it rebounded to levels higher than before the invasion within a month. This historical tendency suggests market declines at the outset of conflicts often prove short-lived as the situation stabilizes.

Key Economic and Geopolitical Factors

Wars influence financial markets through economic and geopolitical channels. Energy prices are susceptible, as conflicts can disrupt oil and gas supplies, leading to price spikes and inflationary pressures. For example, the Russian invasion of Ukraine caused energy and food prices to surge globally.

Global supply chains face disruptions during wartime, resulting in shortages and increased costs for businesses. This affects the availability of components and raw materials, impacting production across industries. Such disruptions contribute to broader inflationary trends, alongside increased government spending on defense.

Inflationary pressures may prompt central banks to raise interest rates, increasing borrowing costs for businesses and consumers. While increased military expenditure stimulates certain sectors, it also contributes to higher national debt. Prolonged uncertainty from geopolitical instability can deter investment and consumer spending, impacting economic growth.

Beyond economic metrics, conflicts can reshape international trade relationships and global economic stability. Sanctions, for instance, can fragment global trade and accelerate protectionist tendencies. These shifts influence investor confidence and can lead to re-evaluation of risk across regions and asset classes.

Sectoral Impacts and Long-Term Trends

Different stock market sectors experience varying impacts during war. Defense and aerospace sectors see increased demand and improved stock performance due to expanding government military budgets. Since the Russia-Ukraine war began, the SPADE Defense Index has risen 48%. Companies like Lockheed Martin and RTX have seen their shares reach all-time highs.

Energy companies also experience volatility and potential gains, especially when conflicts disrupt global oil supplies, leading to higher commodity prices. Oil prices surged during the Russia-Ukraine conflict, benefitting energy sector stocks. Conversely, industries reliant on stable supply chains or consumer discretionary spending may face headwinds.

Technological innovation can be both disrupted and spurred by conflict. While some tech startups in affected regions may face funding challenges and talent migration, war can also accelerate new technology development with military and civilian applications. Despite short-term shocks, the stock market has historically demonstrated a capacity for long-term resilience.

Markets recover and adapt over extended periods, often surprising investors with their ability to overcome global events. The market’s long-term trajectory is driven by economic fundamentals, innovation, and corporate earnings growth, rather than singular geopolitical incidents. This resilience highlights the importance of a long-term investment perspective amidst global instability.