How War Influences The Stock Market
Investing in a time of war. Safeguarding your wealth from the consequences of conflict can be tough.
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When Russian tanks rolled into Ukraine on Feb. 24, beginning the largest land war in Europe since Germany invaded France in May 1940, they also sent shock waves through the markets.
If we want to predict what happen in the future, we should look back and analyze how crises affected the market in the past.
What was the effect on stocks of more than 50 crisis events starting from the Panic of 1907 to the Covid-19 crash of 2020?
You will be shocked but the pattern is the same!
After falling an average of 7% in the immediate aftermath of a crisis, the Dow rose 4.2% over the next three weeks. Nine weeks later, it had gained 6%, and after 18 weeks it was up an average of 9.6%. Not every event followed the pattern precisely, and all were subject to larger economic forces. Yet the study shows a remarkable symmetry in market reaction.
Germany’s invasion of France 82 years ago didn’t come as a surprise — a state of war had existed since Germany’s invasion of Poland the previous year — but it still sent stocks reeling.
The Dow dropped 17.1% in the immediate aftermath and dipped another 0.5% over the next three weeks. But nine weeks later it had gained 8.4%, and it was still up 7% after 18 weeks.
More recently, Russia’s stealth invasion of Crimea in 2014 caused an initial 2.4% drop in the Dow. It then gained 1.2% after three weeks, 4.4% after nine, and 5.7% after 18.
Can I assume that this tendecy will be repeated? I may hope so but there is also other scenario.
The Ukraine war can trigger a lasting bear market. The Iraqi invasion of Kuwait 32 years ago may help illustrate why.
Iraq invaded Kuwait on Aug. 2, 1990 and defeated it within days. Although Kuwait’s population was much smaller than Ukraine’s is now, its invasion by Saddam Hussein was an affront to NATO and OPEC countries. Kuwait didn’t rank among the top 10 global energy producers, yet the S&P 500 dropped 16% and the Nasdaq Composite index fell 25%, as oil rose from $28 to $46 a barrel by mid-October that year.
The current invasion of Ukraine also represents an affront to NATO and geopolitical stability. It could substantially impact energy markets, as Russia is the third-largest producer of energy globally. These factors translate into economic uncertainty and market disruption, as we saw in 1990.
But the Kuwait invasion was met with one of the swiftest military resolutions in history. Coalition forces composed of 35 countries began an air campaign on Jan. 16, 1991, followed by a massive ground campaign. Kuwait was liberated on Feb. 27, only about six months after being invaded. With the Ukraine invasion, however, the path to a quick resolution appears elusive if not improbable. Rather than achieving de-escalation through collective sanctions imposed by an international coalition, the declaration of an “economic war” against Russia, as French Finance Minister Bruno Le Maire has described it, may result in economic backlash against the West.
Instead of the markets bottoming out in 70 days and then rallying, as they did after the invasion of Kuwait, investors might need to expect months or even years of challenges to geopolitical stability and market sentiment.
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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partner websites. The video is accurate as of the posting date but may not be accurate in the future.