Investing Through Uncertainty: Stock Markets and Global Conflicts
Amid rising global tensions and conflicts—such as the Israel-Palestine conflict and the ongoing Ukraine and Russia war—it may be worth exploring how such crises have impacted the economy and investment markets. While these conflicts pose challenges to global peace and safety, they might also indirectly influence economic stability and growth. For example, estimates suggest the U.S. had spent an estimated $8 trillion on post-9/11 wars in the last fiscal year, representing a sizable portion of GDP.
Stock markets during times of war often experience periods of turbulence but also show moments of resilience. Historical patterns suggest that economies and stock markets have demonstrated notable strength in the face of past conflicts. However, for investors, the potential effects of ongoing crises can uderstandably feel concerning. That’s why we at Cooke Wealth Management carefully examine how these conflicts might impact stocks.
Stock Market During War: World War I and II
The stock market has historically experienced significant turbulence during wartime, yet it often demonstrates a pattern of recovery. When World War I erupted, stocks plummeted by approximately 30%, prompting a four-month closure of the markets. Upon reopening in December 1914, however, the Dow Jones Industrial Average staged an impressive recovery, surging over 88%. World War II followed a similar pattern. Despite initial uncertainty following Hitler’s invasion of Poland in 1939, the U.S. market defied expectations, climbing 10%. After the Pearl Harbor attack in 1941, stocks dipped 2.9% but erased those losses within a month. Although 1942 brought a new low, the market ended the year in positive territory. From 1939 to the war’s conclusion in 1945, the Dow ultimately rose by an impressive 50%. These examples highlight a key insight: while war introduces volatility, markets often adapt and rebound, rewarding those who navigate the uncertainty with patience and perspective.
Unlike the World Wars, the Gulf War had a less significant impact on the stock market. Geopolitical tensions sparked limited volatility, with market performance tracking historical averages. This illustrates that context matters, as not all conflicts disrupt markets equally.
Market Resilience and Long-term Trends
While the anticipation of war or the outbreak of conflict can often cause short-term market disruptions, escalating geopolitical uncertainty has not typically resulted in sustained or long-term market declines. Historically, investors have seen markets rebound to pre-conflict levels within weeks or even months following the onset of hostilities.
The broader trend indicates that sharp sell-offs triggered by war are often brief, with markets recovering swiftly once the situation stabilizes or the conflict's scope becomes clearer. This resilience underscores the importance of not always abandoning equities during geopolitical tension. Instead, investors can benefit from understanding historical trends, which provide valuable insights for managing portfolios effectively in such uncertain times.
Investor Responses to War
Geopolitical events can cause global market instability, prompting investors to reassess risk. The threat or onset of war may trigger sharp sell-offs in equities, with many investors shifting capital out of the market in search of perceived safety.
In these moments, investors often seek out “safe-haven assets”—those that are historically viewed as more likely to preserve value during uncertainty.
Gold, government bonds, and strong currencies are among the most commonly favored safe havens. Gold, with its intrinsic value and limited supply, has served as a reliable hedge against economic uncertainty. Government bonds from stable economies are also attractive due to their lower risk and predictable returns.
Additionally, currencies like the U.S. dollar and the Swiss franc are typically seen as stable and resilient, making them a common option for investors during global crises.
Understanding the ‘War Puzzle’
Deciphering stock market behavior during wartime is not always straightforward. A phenomenon known as 'the war puzzle,' identified by researchers at the Swiss Finance Institute, highlights the seemingly paradoxical behavior of markets in these periods. The study found that stock prices generally decline as the likelihood of war increases - a reaction many expect. However, once war officially begins, markets often rebound rather than fall further. Conversely, when conflict begins unexpectedly, without a buildup, markets tend to drop.
Though the exact reasons are unclear, one explanation is that markets prefer certainty—even grim certainty—over ambiguity. Once war is declared, investors can recalibrate based on new information—sometimes resulting in a rebound.
Psychology, Global Markets, and Investor Behavior
Investor responses to conflict are influenced by past experience and evolving global dynamics. In many cases, investors have reacted to war with surprising calm, likely due to familiarity with geopolitical tensions and lessons learned from past recoveries—such as after 9/11 or the 2008 financial crisis.
Experience with prior crises may have equipped many investors to remain calm during new events, confident in the market’s long-term recovery potential.
In addition, structural changes in the global economy have enhanced market resilience. For instance, the U.S. economy is now less sensitive to oil price fluctuations due to changes in energy production and sourcing. This evolution helps dampen some of the shocks that once rattled markets during conflicts.
Historical Stock Performance and the Dow Jones Industrial Average
The outbreak of the World Wars had a profound impact on global stock markets. However, markets displayed intriguing see-saw patterns, with initial declines followed by strong recoveries.
The Dow Jones Industrial Average (DJIA), a widely followed U.S. market index, demonstrated surprising strength during both World Wars. Despite a roughly 30% drop in 1914 and a months-long market closure, the DJIA surged over 88% the year following the reopening.
During World War II, after a brief slump following the invasion of Poland and a dip following Pearl Harbor, the Dow steadily climbed. By the end of the war in 1945, the index had gained over 50%.
This historical stock performance foreshadowed modern “buy the dip” behavior—suggesting that market recoveries can emerge even amid global instability.
This trend continued during World War II. Despite the brief dip following the attack on Pearl Harbor, the Dow quickly recovered those losses in less than a month. Over the entire period from 1939 to 1945, the Dow posted a significant cumulative gain of 50%.
The historical stock performance during the World Wars highlights a dynamic resilience that foreshadowed the modern 'buy the dip' strategy. These examples remind investors that, even in the most challenging times, markets have historically shown an ability to recover—underscoring the enduring strength stocks have demonstrated during past periods of war.
Investment Management With Cooke Wealth Management
At Cooke Wealth Management (CWM), we understand the complexities that markets face during periods of geopolitical tension. Our goal is to align your financial strategies with your long-term goals and values, crafting customized approaches that prioritize growth, stability, and income—even in uncertain times.
Efficiency is central to our portfolio-building process. Through a collaborative approach, we design investment strategies focused to align with your goals—simplifying complexity to help build portfolios that are designed to adapt to changing market conditions.
With over 40 years of combined experience, CWM serves more than 100 families, offering guidance and support throughout your financial journey. As fee-only advisors, our three-step process includes assessing your goals and risk tolerance, designing a tailored portfolio, and providing ongoing management and adjustments to keep you on track.
If you're navigating uncertain times and looking for clarity, we invite you to schedule a discovery session with us. Together, we can help you build a diversified financial plan — designed so you can live life on your terms.
Frequently Asked Questions (FAQ)
Q: How do investment strategies adapt to the stock market during war?
Investment strategies often focus on stability and resilience during times of geopolitical conflict. In such uncertain environments, diversification becomes especially important to help manage the risks that war-related volatility can create in the markets.
Q: What considerations are vital for building stock portfolios during global conflicts?
We believe simplicity and strategic clarity are critical when building stock portfolios in uncertain times. Understanding how markets have responded to past conflicts can help inform adjustments aimed at managing risk and pursuing long-term investment goals.
Q: How can ongoing support enhance stock investment decisions amid geopolitical challenges?
Ongoing support from a trusted financial advisor can provide perspective and structure when navigating market volatility. Regular portfolio reviews and adjustments may help strategies remain aligned with your goals as conditions evolve.
Q: Why is tax efficiency essential for stock investments during uncertain times?
Tax efficiency plays a key role in helping preserve wealth during market disruptions. Strategies focused on minimizing unnecessary taxable transactions can enhance the resilience of a portfolio and support long-term financial objectives.
Q: What principles guide stock investment decisions in times of global conflicts?
Sound investment approaches during global uncertainty are grounded in clear goal-setting, risk awareness, and disciplined portfolio management. Working with an experienced advisor may help ensure that your investment strategy remain aligned with your long-term plan, despite short-term challenges.
If you’re ready for a portfolio review, use the button below to schedule and continue the conversation.
Disclaimer:
Nothing in this article should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any transaction. It should not be construed as investment, tax, or legal advice. Information herein was prepared by or obtained from sources that we believe to be reliable and is meant for general illustration purposes. It is provided for your personal use and information purposes only.
Past performance is not a guarantee or in any way an indicator of future results of any particular investment. No diversification or asset allocation strategy can eliminate investment risk or losses or protect against loss in declining markets. All investments involve risk including loss of principal. Investing in fixed income securities (bonds) involves interest rate risk, credit risk, and inflation risk. Investing in stock securities involves volatility risk, market risk, business risk, and industry risk. International investing involves additional risks including, but not limited to, changes in currency exchange rates, differences in accounting and taxation policies, and political or economic instabilities which can increase or decrease returns.
Indexes are unmanaged baskets of securities that investors cannot directly invest in. 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”).