War in Ukraine and Stocks

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The news of war this past week in Ukraine sent market volatility up and global markets down. The CBOE VIX spiked to over 30. Oil prices went over $100 per barrel, and gold prices went over $1,900 per ounce. However, all the major indices and exchanges were down. The Nasdaq neared a bear market on February 24^th. However, by the end of the week, the oil prices dropped back to where they were at the start of the week. In addition, stock market indices and exchanges recovered, finishing above where they started at the beginning of the week, as seen in the chart below from StockRover. Seemingly, investors and the stock markets shrugged off the war in Ukraine.

This fact brings up the question of the effect of war on stocks? 

Source: OilPrice.com

Source: StockRover

War and Stocks

Effect of War on Stocks

The common perception is probably that it is a significant negative. In many cases, the initial stages of war or conflict are negative for stocks. However, the long-term impact is often tiny, especially if the war does not directly involve a country. For instance, most western stock markets have ignored conflicts in the Middle East and Africa.

As Ben Carlson points out,

“From the start of WWII 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 US stock market was up a combined 115%,”

Furthermore, LPL Research examined geopolitical events and stock market performance and found a short-term negative effect, but returns were positive over the long term. For instance, their study showed between 1990 and 2000, the Dow Jones Industrial Average (DJIA) declined about 2% on average during 16 significant events, including the Gulf War, Iraq War, and 9/11. However, the Dow 30 rose an average of 5% at three months and 7.9% at six months after the event.

The table below shows the results of reviewing 20 major geopolitical events from World War II until 20. The average 1-day decline was (-1.2%), and the average total reduction was (-5.0%). In addition, it took on average 22 days to reach the maximum decline and 47 days for recovery.

Source: LPL Research

So, it is not clear stock prices will decrease over the long-term only because of war or conflict. Instead, they seem to rise over time.

Why Do Stocks Rise During Times of War?

Another study found that when there is a pre-war phase or a surprise outbreak of war, there is a decrease in stock prices. However, the outbreak of war usually causes an increase in stock prices—the reasons why were not clear.

Yet another study by Mark Ambruster of the CFA Institute examined returns and volatility of US stocks and other asset classes during World War II, the Korean War, the Vietnam War, and the Gulf War. He looked at large-cap stocks, small-cap stocks, long-term bonds, five-year notes, and long-term credit. The results show that stocks typically outperform with lower volatility, especially small-cap stocks. On the other hand, long-term bonds, 5-year notes, and long-term credit underperform. The only exception was the Vietnam War.

Source: CFA Institute

Investors’ recent experience certainly supports the conclusions of the studies mentioned above. Russian troop buildup near the Ukraine border was first reported on October 30th, 2021, by the Washington Post. The stock market plateaued between that time and early January when it started to decline. However, once the attack began, the stock market surged on February 24 and 25, 2022.

Final Thoughts on War and Stocks

Overall, the reasons why stocks perform as they do during wars, conflicts, and geopolitical events are not clear. However, investors are probably better off not guessing what will happen. Ultimately, a long-term dividend growth investor is a buy-and-hold investor.