War and markets: What's the connection?

Owen Lamont, PhD, Associate Director of Multi-Asset Research, Quantitative Investment Group
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Amid the geopolitical turmoil and tragic humanitarian fallout of the Russia/Ukraine crisis, many investors are naturally also concerned about the negative effects the escalating conflict could have on their portfolios. With that in mind, I thought I’d provide a quick snapshot of the impacts that past wars have tended to have on asset prices. From a historical perspective, I found three points in particular worth highlighting: 

  1. War news often has a surprisingly small impact on financial markets (i.e., stock and bond prices).
  2. But sometimes war has a big long-term impact (especially if it causes a country to collapse).
  3. War does not necessarily generate attractive equity buying opportunities for investors.

In the interest of full disclosure, of these three points, I am most confident about the first one as of this writing. In any case, based on the evidence at hand, I’m not taken aback that US financial markets have not gone totally haywire in response to the crisis. All things considered, they’ve actually been relatively calm. My key takeaway for investors is that, if history is any guide, it’s not clear to me that the current conflict implies now is an especially good time to be buying risky assets. 

1. War news often has a surprisingly small impact on financial markets.

In US equity market history, there has often been surprisingly little market impact from wars, other conflicts, and assassinations. As shown in a 1989 article by Cutler, Poterba, and Summers, most large daily moves in US stock prices (such as the October 1987 market crash) have not been triggered by obvious exogenous (and usually unforeseen) news shocks.

For example, the US stock market fell only 4% the day after the 7 December 1941 Pearl Harbor attack and only 3% the day after President John F. Kennedy was assassinated in November 1963 (Figure 1). A follow-up article by Bradford Cornell  reached similar conclusions, noting that US stock prices dropped only 5% when the market reopened after the horrific events of 11 September 2001.

Figure 1

In addition, a study by Baker, Bloom, Davis, and Sammon found that only 9% of the large moves in US stocks from 1900 to 2020 have been associated with “sovereign military and security actions,” with much of that price action occurring around the time of World War I and very little coming from either the Korean War or the Vietnam War.

Turning to global equities and US fixed income, again we find fairly small impacts from war and conflict, with the Baker, Bloom, Davis, and Sammon study reporting that only 3% – 4% of the big price moves in non-US stock market history and only 1% of such moves in US bond markets have been driven by such “sovereign military and security actions. 

2. But sometimes war has a big long-term impact (especially if it causes a country to collapse). 

However, if a war or conflict ultimately results in the collapse of a country and/or its economy, that outcome is rarely good news for investors in the country’s stocks and bonds (read: Confederate States of America when the US Civil War ended in 1865). A 2008 Ferguson article cites several prominent historical examples, including how investors in German equities did not fare well after both of the two twentieth-century world wars that Germany lost.

Moreover, even if a country winds up “winning” a war or at least not losing it, the country (along with its asset prices) may still find itself in quite poor shape post-conflict. For instance, investors in British bonds struggled mightily both during and following World War I. As Ferguson writes:

Investors try to learn from history, but the very different financial impacts of the two world wars and the Cold War reveal the tendency of military technology and regulatory regimes to shift significantly, reducing the relevance of past experience. Any lessons investors might take from the last war could have limited relevance for the next — or be forgotten after a generation of relative peace has led to complacency.

3. War does not necessarily generate attractive equity buying opportunities for investors.

Allegedly said in 1810 by financier Nathan Rothschild: “Buy on the sound of cannons, sell on the sound of trumpets.” Certainly said more recently by superinvestor Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful.”

I cannot bring a ton of insight to this topic right now, but as far as I can tell, it does not appear to be generally true that when country ABC goes to war, its stock market will be a “good value” with a high likelihood of performing strongly going forward. A 2010 Berkman, Jacobsen, and Lee study created a “crisis index” showing that while US stock prices often look cheap in times of heightened global crisis, that typically has not translated into a subsequent reality of high returns to investors.

One obstacle here is that the available data does not include very many observations of full-scale war. (Figure 2 shows that across 167 nations from 1918 – 2006, there was only a 1.35% chance that a given country in a given year would be embroiled in an all-out war.) At any rate, the Berkman, Jacobsen, and Lee research demonstrates that situations like Russia/Ukraine — a severe crisis involving a major world power — have more of an impact on global equity markets when they first break out, but what it does not do is present any convincing evidence that such conflicts spawn buying opportunities for investors.

Figure 2
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owen lamont
Owen Lamont, PhD
Associate Director of Multi-Asset Research, Quantitative Investment Group