Key Takeaways
- Wars often lead to short-term stock market sell-offs, but markets typically recover as situations stabilize.
- Defense and energy stocks tend to perform well during wartime, benefiting from increased demand.
- Historical data show that major geopolitical events often do not have a lasting negative impact on U.S. stocks.
Global conflicts, from Russia’s invasion of Ukraine to the U.S. war in Iran, influence market sentiment and spark short-term volatility. History shows that U.S. stocks often rebound after initial sell-offs, highlighting the market’s long-term resilience during periods of uncertainty.
Defense, energy, and other security-linked sectors usually see increased activity, though market reactions can vary because of the “war puzzle,” where outcomes depend on whether a conflict is expected or arrives unexpectedly.
Stock Market Resilience During Geopolitical Crises
War often brings about a level of uncertainty. The outbreak or anticipation of war can lead to a sharp sell-off in stocks. Investors may move toward traditionally safer assets like gold, bonds, or currencies perceived as safe havens. Despite the initial negative reaction, stock markets have shown resilience over time. Indeed, they often quickly recover as the situation stabilizes or as the scope of the conflict becomes clearer.
LPL Financial research notes that stocks have largely shrugged off past geopolitical conflicts. “As serious as this escalation is, previous experiences have indicated it may be unlikely to have a material impact on U.S. economic fundamentals or corporate profits,” said former LPL Financial Chief Investment Strategist John Lynch, referring to the January 2020 U.S. airstrike that killed Iranian general Qasem Soleimani. “We would not be sellers of stocks into weakness related to this event, given stocks have weathered heightened geopolitical tensions in the past.”
“From the start of World War II in 1939 until it ended in late 1945, the Dow was up a total of 50%, more than 7% per year. So, during two of the worst wars in modern history, the U.S. stock market was up a combined 115%,” wrote Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, in an article about counterintuitive market outcomes. “The relationship between geopolitical crises and market outcomes isn’t as simple as it seems.”
S&P 500 Index Price From When Russia Invaded Ukraine to a Month Later
Another example is after Russia invaded Ukraine in 2022, which rattled global markets. In the U.S., the S&P 500 index fell more than 7% in the days and weeks immediately following the incursion, as the U.S. and other nations stepped up severe economic sanctions on Russia and investors worried about the impact of commodity prices. But a month later, markets had rebounded, and the S&P was trading higher than before the invasion, even as the price of oil remained elevated above $100 a barrel.
S&P 500 Index Price From the Simchat Torah Hamas Massacre of Israeli Civilians to Several Days After
In the conflict between Israel and Palestinian militants that began in October 2023, the S&P 500 sank briefly on the first trading day following the massacre of Israeli civilians. But as the Israeli army and air force responded, the S&P rose over the following week. Since the conflict involves the Middle East, with the potential for other regional interests to enter the conflict, the price of oil rose moderately from around $83 to $86 per barrel, but still well below near-term highs of around $94 in September 2023.
Factors Leading to Stock Market Volatility in Wartime
So how do markets perform after geopolitical shocks? Better than you’d expect. LPL Financial data show the average S&P 500 drawdown after major geopolitical events is just 4.6%, with stocks typically recovering within about six weeks. A year later, the picture is often even better: the S&P 500 posted double-digit gains in the 12 months following Pearl Harbor, the Cuban missile crisis, the Kennedy assassination, and the start of the Israel-Hamas war.
The notable exception: the 1973 Yom Kippur War, where a small initial dip gave way to a 41% decline over the following year as the OPEC oil embargo choked global energy supplies — a reminder that conflicts involving major oil producers carry unique risks.
In cases when a war starts as a surprise, the outbreak of war decreases stock prices. They called this phenomenon “the war puzzle” and said there is no clear explanation for why stocks increase significantly when war breaks out after a prelude.
Mark Armbruster, president of Armbruster Capital Management, studied the period from 1926 through July 2013 and found that stock market volatility was actually lower during periods of war. “Intuitively, one would expect the uncertainty of the geopolitical environment to spill over into the stock market. However, that has not been the case, except during the Gulf War when volatility was roughly in line with the historical average,” he said.
Investors have historically had a muted reaction to Iran-related headlines. “If 2019 taught us anything [when the U.S. was involved in previous strikes against the country], it’s that you have to try as best as possible to keep to your process and not get caught up in the headlines,” Strategas Technical Director Todd Sohn told the Washington Post at the time. “In a sad way, I wonder if we’ve become used to it.”
“Part of the reason for the calm may lie in the changing structure of global oil markets and how the U.S. economy has become less vulnerable to energy price swings,” said J.P. Morgan Funds Chief Global Strategist David Kelly. “Part of the reason may be purely psychological. Today’s investors have seen the stock market recover from both 9/11 and the Great Financial Crisis, arguably the greatest geopolitical and economic shocks of our time. This makes it easier for investors to shrug off other events.”
Broader conflicts involving major oil producers can also cause volatile oil markets. If a major producer were to shut off the spigot or suffer significant oil infrastructure damage, as markets feared when the U.S. attacked Iran, it could lead to higher energy prices.
Why Do Stock Markets Remain Resilient Through Wars?
In the U.S. context, stock markets have tended to shrug off initial downturns predicated by conflict. In some ways, wars can benefit economies not directly affected by the conflict by boosting industrial production to meet the military needs of those engaged in battle. The development of new technologies, some of which can be applied to the private sector, is also often spurred on by armed conflict.
Which Stocks Do Best During a War?
In general, defense stocks (companies that produce weapons and armaments) tend to fare the best during a wartime environment. Energy companies may also see a boost in conflicts that result in higher oil and commodity prices.
How Have Stocks Performed at the Onset of the World Wars?
World War I: Stocks fell around 30% at the outbreak of WWI and markets were closed for six months. When they reopened, the Dow rose more than 88% in 1915.
World War II: The stock market actually rose by 10% just after Hitler invaded Poland in 1939. After the Japanese attack on Pearl Harbor occurred, stocks fell 2.9% but regained those losses in less than a month. From 1939 until the end of the war in late 1945, the Dow saw increases of 50%,
The Bottom Line
Markets often recover quickly from war-related shocks, and sectors like defense and energy tend to hold up well despite early volatility. While geopolitical events can still trigger unpredictable reactions, history shows U.S. equities are generally resilient. In uncertain environments, investors often favor financially solid companies and avoid sudden moves into riskier, less liquid areas.