How does the stock market behave during war times?
Markets do not always follow conventional wisdom, and uncertain situations do not always play out in the way that many would have you believe. The link between geopolitical crises and market outcomes is not as straightforward as it may appear.
The Dow fell more than 30% in the six months following the outbreak of World War I in 1914. Due to the fact that the war effectively brought the business world to a halt and market liquidity virtually dried up, the decision was made that year to close the stock market. This lasted six months, the longest period in recorded history. To make up for a lost time, the Dow rose more than 88 percent following its reopening in 1915, which remains the DJIA's highest annual return on record. Indeed, from the outbreak of the war in 1914 to the war's conclusion in late 1918, the Dow gained more than 43% in total or approximately 8.7% annually.
World War II produced a similarly illogical market outcome. On September 1, 1939, Hitler invaded Poland, igniting the war. When the market opened on September 5, the Dow surged nearly 10% higher. When the attack on the US naval base at Pearl Harbor occurred in early December 1941, stocks opened down 2.9 percent the following Monday, but recovered in less than a month. The stock market paid little attention when the allied forces invaded France on D-Day, June 6, 1944. The Dow gained more than 5% in the subsequent month.
Between the start of WWII in 1939 and its conclusion in late 1945, the Dow gained a total of 50%, or more than 7% per year. Thus, the US stock market gained a combined 115 percent during two of the worst wars in modern history.
In October 1962, the world was on the verge of nuclear war due to the United States' standoff with Russia during the Cuban Missile Crisis. The standoff lasted 13 days. The Dow remained surprisingly stable over that two-week period, losing just 1.2 percent. The Dow would gain more than 10% for the remainder of that year. Art Cashin, a veteran trader, recounts the following advice he received from a seasoned trader during the Cuban Missile Crisis, when he was concerned about the effect on stocks:
Russia put its nuclear forces on high alert on 27th February, 2022. The war in Ukraine was the beginning of something which took years to accumulate and build pressure. NATO has covered a significant portion of the western border with Russia and Ukraine would have been the last step in establishing Western Dominance. The barrage of sanctions on the Russian Government, Banks, Individuals, and even the Central Bank is expected to hamper the economy significantly. However, western forces have still been wary of sanctioning entities related to energy and oil. With inflation transforming from “transitory” to persistent, high inflation would be the last nail in the coffin for Domestic Political Support.
The India VIX is at levels last seen only during the second wave. The daily movement has become extremely dependent on the news related to the Ukraine Crisis. An already bloated valuation coupled with new uncertainties is driving the volatility.
Investors have had a dream run since the beginning of the Pandemic. Only time will tell how big a correction if any, will happen in the future. It highly depends on what the end game for the war would be. Will this be restricted to restructuring the borders of Ukraine? Displacing the Government with a pro Russian one? Or maybe this expanding into a large-scale war where the western forces also get involved?