In the wake of increasing global tensions and conflicts, such as the Israel-Palestine issue and the potential nuclear threats of Iran and North Korea, let’s delve into the economic ripples these crises create. While these conflicts threaten global peace and safety, they indirectly impact economic stability and growth. For instance, the U.S. had spent an estimated $8 trillion on post-9/11 wars in the last fiscal year - a substantial share of our GDP.

Any stock market during war is marked by periods of tumult and resilience. History clearly shows that the economy and stock markets have shown impressive robustness in the face of past wars. Yet, to an investor, the potential impact of the ongoing conflicts can still be worrisome at times.  That’s why we at CWM prepared a short deep dive looking at how armed conflicts affect stocks. 

Stock Market During War: World War I and II 

The stock market during war was indeed turbulent. When World War I broke out, stocks fell about 30%, leading to a roughly four-month closure of the markets. However, upon reopening in December 1914, the Dow Jones Industrial Average bounced back impressively, rising more than 88%. World War II was similar in its effect. Despite initial uncertainty after Hitler invaded Poland in 1939, the U.S. stock market surprisingly rose by 10%. After the attack on Pearl Harbor, stocks dipped by 2.9% but recovered those losses in less than a month. In 1942 the market dropped and hit a new low, but managed to end the year positive. From 1939 until the war culminated in 1945, the Dow saw an overall surge of 50%.

Unlike the World Wars, the Gulf War had a less pronounced impact on the markets. The surge in geopolitical tensions did not excessively stoke market volatility. Market performance during the Gulf War stood roughly in line with the historical average.

Market Resilience and Long-term Trends

Despite the negative impacts that can initially occur from conflict or the anticipation of war, escalating geopolitical uncertainty has not led to sustained or long-term downside in the market. Indeed, investors have historically seen rapid recovery to pre-invasion levels only weeks or months after the commencement of conflicts. 

The long-term trend suggests that any sharp sell-offs induced by war are generally short-lived, and markets tend to quickly bounce back once the situation stabilizes or the scope of the conflict becomes clearer. The market's resilience reinforces the idea that investors should not outrightly dismiss stocks during war. Instead, understanding the historical contexts can provide crucial insight into navigating portfolio management during geopolitical strain.

Investor Responses To War

Conflicts and turmoil often translate into instability and uncertainty for the global economy, including the stock market. The threat or actual commencement of war can spark a sharp sell-off in stocks and equities, causing numerous investors to pull their money out of these investments. It's common to see stock indexes plummet globally amidst the initial news of war or conflict.

After pulling out from stocks, investors tend to instinctively gear their resources towards what is colloquially known as "safe-haven assets." These assets are perceived to hold or even gain value during times of crisis, thereby providing shelter against financial storms caused by geopolitical adversity.

Gold, government bonds, and certain strong currencies tend to be among the most sought-after safe-haven assets. With its physical value and scarcity, gold has historically been a hedge for investors against economic crises. Government bonds, especially those issued by stable economies, can be favored due to their guarantee of returns.

Additionally, powerful and stable currencies, such as the U.S. dollar or the Swiss franc, may be preferred by investors for their perceived strength and stability against volatile market conditions.

Understanding Stock Market Behavior In Uncertain Times

Deciphering stock market behavior during times of war can be a complex task. A phenomenon aptly named "the war puzzle" by researchers at the Swiss Finance Institute shed light on the seemingly paradoxical behavior of stock prices during wartime. The study suggests that stock prices tend to decrease as the likelihood of war escalates during the prewar phase (no surprise there), but paradoxically, the outbreak of war causes them to increase. On the other hand, when a war begins unexpectedly with no intro, stock prices tend to decrease rather than increase.

The reason behind this counterintuitive behavior of stock prices remains unanswered . It's almost as if the market is masked by ambiguity during the uncertainty phase. Still, when war is declared, it reveals a roadmap, however grim it may be, providing some certainty to investors. 

Investor Psychology And The Changing Structure Of Global Markets

How investors react to war and conflict is a result not only of the circumstances surrounding the war but also of changing investor psychology and evolving global markets.

In many instances, investors have responded to war calmly, possibly because they have become more accustomed to geopolitical crisis headlines. This could also be attributed to lessons learned from stock market recoveries post-9/11 and after the Great Financial Crisis. 

These experiences of resilience help investors shrug off minor events, knowing the potential for the market to rebound.

The changing dynamics of the global market also play a crucial role. For example, the U.S. economy has become less vulnerable to energy price swings, thanks to the changing structure of global oil markets. Market resilience, therefore, becomes a confluence of the historical capacity to endure shocks, evolving investor attitudes, and changing market dynamics. Such resilience factors significantly affected the discussion on stocks during the war.

Stock Performance In World Wars

The outbreak of the World Wars had significant impacts on global stock markets. However, markets showcased intriguing see-saw patterns of initial drops, followed by robust recoveries.

At the onset of World War I, stocks faced a sharp decline. The uncertainty, combined with the scale of the conflict, led to an approximate 30% drop in stock prices. Furthermore, the stock markets shuttered for about half a year following the outbreak. However, when they did reopen, they displayed a dramatic comeback.

World War II had a similar narrative. There was a degree of shock following Adolf Hitler's invasion of Poland in 1939, resulting in an initial slump in stock prices. Nonetheless, this stumble was swiftly overturned, as stocks rose by about 10% immediately.

Impact on Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA), which provides a performance benchmark for the U.S. stock market, proved resilient amidst these conflicts. Despite the initial drops in the market, the Dow rose by more than 88% in 1915, after the commencement of World War I.

The trend continued during World War II, where, despite the minor fall of the attack on Pearl Harbor, the Dow recuperated those losses in less than a month. Looking at the entire span from 1939 to 1945, the Dow experienced a substantial cumulative rise of 50%.

Historical stock performance during the World Wars showcases a dynamic resilience preluding the 'buying the dip' mantra. The World War examples remind investors that even during the direst of contexts, there is potential for the market to recover and even advance, illuminating the strength of stocks during wars.

Investment Management With CWM During War

At Cooke Wealth Management (CWM), we acknowledge the complexities introduced by the stock market during war. We commit to aligning your financial strategies with your distinctive goals and values. We craft customized strategies that prioritize growth, stability, and income, even amid the uncertainties of war.

Efficiency is at the core of our portfolio-building process. Working closely with you, we create smart investment strategies designed to resonate with your financial objectives, simplifying the intricacies of the market for an effective and resilient portfolio during times of war.

With over 35 years of combined experience, CWM provides ongoing guidance and support to over 100 families. As fee-only advisors, our three-step process involves collaboratively assessing your goals and risk tolerance, creating a customized portfolio, and providing continuous management, monitoring, and modification.

CWM is your reliable support network in a world marked by geopolitical challenges. We actively seek ways to minimize taxable transactions within your portfolio for efficient investing. If you're navigating uncertain times, we invite you to schedule a discovery session and work together to build a resilient financial plan to let you live on your terms.

Frequently Asked Questions (FAQ)

Q: How do investment strategies adapt to the stock market during war?

• Investment strategies must prioritize stability and resilience, especially considering the impact of global conflicts. Diversification becomes crucial to navigate uncertainties affecting stocks during war.

Q: What considerations are vital for building stock portfolios during global conflicts?

• Crafting stock portfolios with simplicity and effectiveness is key to aligning strategies with individual objectives. The focus should be on understanding how the stock market behaves during the war and adjusting portfolios accordingly.

Q: How can ongoing support enhance stock investment decisions amid geopolitical challenges?

• Ongoing support from financial advisors is crucial for monitoring and modifying stock portfolios in response to changing market dynamics during the war. Regular guidance helps navigate the uncertainties associated with stocks during the war.

Q: Why is tax efficiency essential for stock investments during uncertain times?

• Tax efficiency is critical in preserving wealth during uncertain times, especially considering the impact on stocks during war. Strategies minimizing taxable transactions within stock portfolios contribute to overall financial resilience.

Q: What principles guide stock investment decisions in times of global conflicts?

• Principles include aligning goals, assessing risks, and continuously monitoring stock portfolios. Seeking guidance from experienced financial professionals and building stock portfolios with a long-term perspective are essential strategies during war.

Disclaimer: 

Past performance is not a guarantee or in any way an indicator of future results of either the indices or any particular investment. All investments involve risk including loss of principal. The Dow Jones Industrial Average (DJIA) is Composed of 30 “Blue-Chip” US Stocks. THE DOW and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings LLC (“Dow Jones”). Indexes are unmanaged baskets of securities that investors cannot directly invest in.

No diversification or asset allocation strategy can eliminate investment risk or losses and there can be no assurances that the expected performance will be realized. These strategies may however, provide opportunities to lessen your portfolio's volatility. Investors should be aware of additional risks associated with international investing such as increased volatility, currency fluctuations, and differences in auditing and financial standards.