The Relationship Between War & Investing

News of Russia’s invasion of Ukraine dominates recent headlines. At the time of writing the S&P 500 was down -2% at the market open but has recovered and is down -1%.¹ European stock markets are down between -3% and -5%.² Brent Crude oil prices jumped 6% and gold is up 10%.³ Technology stocks, as represented by the Nasdaq index, dropped 3% at open but recovered to be down modestly -0.4%.⁴ But how should investors think about military conflict and their portfolios?

Market veterans like to say that investors hate uncertainty and military conflicts create uncertainty in spades. However, stock markets have weathered the majority of military conflicts (including terrorist attacks) surprisingly well. In most cases markets experienced modest losses averaging -5% and recovered within 47 days.

Source: LPL Financial, 1/6/20 (5)

This may be confusing – shouldn’t something as serious as an invasion or war have a serious impact on the stock market? I believe the calm response of the stock market to historical conflicts is due to the stock market’s narrow focus on how a given event will impact global company earnings, global consumer spending, and the global supply of funds. If we apply that framework to the Ukrainian conflict we can see that the invasion will certainly impact some of the food, metals, and materials that Ukraine provides to markets but is unlikely to disrupt the global economy. Ukraine’s GDP was $155 billion in 2021 ⁶ or 0.18% of the global GDP of $18.71 trillion. ⁷ That amount is likely too small to warrant a major response by global stock markets. While the invasion is historically important for the people of Ukraine and should be taken seriously from a political, military, and social perspective investors should view it from an economic framework.

This mindset also explains why a regional or world war may have a larger impact on stock markets. The amount of disruption to companies, consumers, borders, transportation, assets, and safety was significantly higher while uncertainty was enormous. In the six months following World War I the Dow fell more than 30%. ⁸ However even this global conflict ended well for the stock market: from the start of war in 1914 to the end in late 1918 the Dow was up more than 43% or 8.7% annually. ⁹ Similarly, from the start of World War II until it ended in 1945 the Dow was up 50%, or more than 7% per year. ¹⁰ One question is how this conflict may affect the Federal Reserve’s intention to raise interest rates to combat higher inflation. While lower stock prices may give the Federal Reserve some breathing room to raise rates more gradually the Federal Reserve may still raise rates to deal with persistent inflation.

Market volatility can remind investors that it’s important to remain diversified through ups and downs, avoid selling, and hold assets that can weather declines in stock prices. Bonds, commodities, and managed futures can fill this role. We don’t know what this conflict will mean for the world, how long it will last, or how stocks will respond. But stocks have been surprisingly resilient to short-term and long-term military conflicts.

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All written content is for information purposes only. Opinions expressed herein are solely those of Summit Hill Wealth Management, LLC and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered by Summit Hill Wealth Management, LLC a Registered Investment Advisor in the State of Colorado.

Sources

1. Market data from Bloomberg

2. Ibid

3. Market data from Bloomberg

4. Market data from Bloomberg

5. LPL Financial Research, 1/5/20

6. Trading Economics

7. World Bank Data

8. “The Relationship Between War & The Stock Market”, 1/14/20, A Wealth of Common Sense

9. Ibid

10. Ibid