What Does War Mean for the Stock Market?

Hello, Matt with EWA. Chris with EWA. So, Matt, with everything that’s going on with the war in Russia, with Ukraine, many people are saying potentially this could turn into World War III even. What has history shown us or what has history taught us with war and how that relates to the stock market?

Yeah, great question, Chris. So first things first. The the big factor here for investors is that Russia is a key supplier of oil to the majority of Central Europe. So if they were to suddenly shut off their supply, there could be a scarcity around the supply, and that could cause both short term issues, inflationary concerns, but long term could potentially make some other countries energy independent, which would be a good thing long term for the power to even out in Europe.

So history, however, tells us that the periods before war where there’s uncertainty that maybe a war is going to occur, the stock market typically drops. Once the war does occur, the market typically is positive.

So we actually have some data to back this up in general, and we’re talking about the large cap stock market from the Great Depression 1926 to 2013. The return was 10%, and the risk, the standard deviation that you had taken was 19%.

And then if we look at just periods of wars in large cap stocks, the returns were 11.4%, a little bit higher than in the general period of the stock market mentioned above, and the risk was 12.8%. The standard, the volatility was actually less during the periods of war.

So historically, if we just look at how does the market perform. During the war, not before the war, but during the war, it’s been better, and generally speaking, the market overall. And then if we look at some of the most significant wars and how they shaped the world so World War II, the returns were 16.9%, lower risk 13.8, korean War higher 18.7, with a risk of 11.1.

And then the Vietnam War was one that trailed the general market, but still a positive return of 6.4. And then the Gulf War was also beat the general stock market historically at 11.7%. So in generalities, the periods during times of war equities in the US.

Typically perform better than they do historically overall. Then, our second piece of data is just to look at major market events and looking at what happened during one day. What was the total drawdown of the S and P 500?

How many days did it take to go to the bottom and how many days it takes the recovery? Look at the screen. The average drawdown of the SP 500 during some of these tough terrorist attacks or wars, et cetera, the average drawdown was 5%.

It took 22 days to reach the bottom and then 47 days to reach the full recovery. So the worst of these was actually the Pearl Harbor attack, which was a drop of 19.8%. So it was the largest drop that we see on the screen here.

The bottom took 143 days, so it’s almost half the year that there’s anticipation going to end. Then it took almost a full calendar year. So 307 days for the full recovery. But in generalities, you can see that no event that we have on the screen, which includes a lot of the significant events, took more than one year for a full recovery.

And the drawdown wasn’t that different than the average draw. Of the US. Markets. We live from 1980 to 2020. The average drawdown in the SP 500 was 14%, and about 75% of those years, despite the average of 14% drawdown, the market still returned positive for the year.

So our recommendation, obviously, asset allocation diversification stay invested, keep the reserves you need to meet short term needs. If you’re actively working and have a consistent paycheck, six month emergency fund, or any purchases that you’re going to make in the next one to three years, make sure those are liquid and cash.

And then if you’re retired, make sure that whatever gap you have that you spend above Social Security or above a pension payment, that you have seven years worth of backup in something safe. Good plan can get you through a bad time.

And although these are uncertain times, for are confident that a long term investor like you and us will always prevail.