Russia just sent troops into two breakaway regions in eastern Ukraine…
And the U.S. and its allies quickly enacted sanctions to punish the country for the invasion.
We can’t predict how things will play out from here. Russian President Vladimir Putin’s next move is unclear. But if you think we’re about to go to war with Russia, you’re not alone…
According to SentimentTrader.com’s Jason Goepfert, hedging activity recently hit its highest level in two years. At the end of January, small options traders bought 40% more puts (basically stock insurance) than during the worst week of the March 2020 market crash.
These folks are spooked about the implications of Russia invading Ukraine. And beyond that, it remains to be seen if China will follow through with an invasion of Taiwan.
But as we’ll discuss today, what the market says about war might surprise you…
In short, the market’s reaction to war throughout history is different than what you would expect.
Now, the S&P 500 Index wasn’t around at the time of World War I. So I used the Dow Jones Industrial Average for my analysis. The Dow measures the 30 most prominent U.S. businesses of any given period. And it goes back to the late 1800s.
Around the time of World War I, this is what the Dow looked like…
Notice what happened in 1914… When war broke out, the markets closed for a couple of months. Then, toward the end of that year, they reopened and moved approximately 30% lower.
From there, the Dow rose until the U.S. entered the war three years later. After that, it went down about 25% before recovering into the end of the war in November 1918.
Here’s the important point… While the Dow experienced a good amount of volatility during World War I, it ended in 1918 at about the same level as when war first broke out in 1914.
A similar situation played out around World War II in the 1940s. Take a look…
When the Germans took Paris in June 1940, the market dropped about 25%.
And again, the U.S. didn’t officially enter the conflict until it was underway. In this case, as everyone knows, that happened after Japan bombed Pearl Harbor in December 1941. After that, the market dropped another 10% or so before bottoming in early 1942.
But as you can see in the chart, the Dow soon bounced back. When World War II ended in September 1945, the market was up about 10% from the start of the war.
The market reacted to the Vietnam War along these lines as well…
While an initial drop in the Dow didn’t occur when the U.S. entered the war in March 1965, it was around 900 at that point. The stock market saw a lot of volatility over the next eight years. But when the U.S. left the country in March 1973, the Dow was still at about 900.
Simply put, the markets interact with war differently than the rest of the world. Wars are Earth-shattering events. But for the markets… not so much.
Sure, when war breaks out, the stock market drops. And when the U.S. enters a conflict, it drops again. But by the end of the war, the market tends to even out – or better.
Obviously, no one wants war. But as we’ve learned today, the risk of it isn’t something you should fear when it comes to your investments.
The fact is, the markets measure the continued growth of humanity. And it’s hard to derail that progress over the long term – even in times of war.
Good investing,
Karina Kovalcik
