Compared to the profound effects war has on the lives of the combatants, their families, and civilian victims, the financial ramifications of war are insignificant. Plenty of the aspects surrounding war reasonably raise, if not require, concern. Don’t include the stock market on that list. There is essentially no correlation between stock returns and sustained U.S. involvement in armed conflict.
Beginning with the Spanish-American War in 1898 and ending with the second Iraq War (2014-2021), the U.S. has been involved in 10 sustained military actions around the world. The average return of the U.S. stock market during those wars was 10.5%. The U.S. stock market increased 7 times. Among the 3 wars in which the stock market declined, two drops were significant: World War I (-32%) and the Vietnam War (-40%).
The S&P 500 increased 55% during World War II.
If you are trying to explain the reaction of the stock market to war, you can find a study that will support almost any conclusion you would like to believe. Generally, however, the reaction of the stock market to a military action needs to be divided into two components: the immediate reaction and the longer-term movement of stock prices. Because the stock market reacts to unanticipated events, the beginning of U.S. involvement in broad military actions is often a trigger for Wall Street selling. Following the bombing of Pearl Harbor, the market declined 6.5 percent. A month later, however, stocks had risen almost 4 percent.
The U.S. stock market was closed for a week following the 9/11 attacks in 2001. When stocks resumed trading on September 17, prices dropped 5%, all of which was recovered within a month.
When in 1962 the Soviet Union built nuclear missile sites in Cuba and the U.S. placed a very public blockade around the island, investors reacted to the brink of nuclear war with an almost 10%, one-day drop in stock prices. A month later, the market had increased 15%. Six months later, the S&P 500 had increased almost 30%.
I was surprised that the U.S. stock market didn’t initially react negatively to the Hamas attacks, increasing less than one percent in the trading day following the Saturday massacre. The TA-35 index, the Israeli equivalent of the S&P 500, dropped 7% in the trading day immediately following the attacks. That’s the equivalent of a 2,400-point drop in the Dow Jones Industrial Average.
You may find this topic – war and investing – crass or cold. But some people are going to let human tragedy influence their investment decisions. I recommend against it, but if you can’t resist, it’s important to recognize that that war is not a very useful stock market prediction tool.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.