Share Prices & Company Research


14 April 2022

Conflict and Markets

Financial markets can fall for a variety of reasons: financial distress, tightening of economic policy and market bubbles, amongst others. War, however, often stokes the most panic. The threat of world war and mutually assured destruction would unsurprisingly weigh heavily on investors’ minds, but this instantaneous response is often superseded by a general recognition that in the long-term, businesses will prevail and markets will rise accordingly.
You would imagine during times of conflict that returns would suffer at the hands of heightened risk, however, the data actually paints a different picture. Risk across large and small cap stocks, as well as bond, credit and cash markets, actually fell during times of war (looking at the period four months before conflict to the end of the conflict, across WW2 and the Korean, Vietnam and Gulf wars) and returns slightly improved across equity markets, an outstanding statistic given the heightened level of uncertainty that conflict presents.
This is not to say that markets do not suffer during times of war, in fact, the initial reaction tends to be swift and sharp with an average fall of -14.8% (WW2, Korean War, Vietnam War, Cuban Missile Crisis, Iraq Wars One and Two) lasting between five days and 36 months. Just six months after the S&P500 reaches its lowest point during the conflict, however, the average return reaches 26.4%, rising to 38.6% after 12 months. Markets, therefore, seem to almost accept the situation and, after initial downward pressure, look to an eventual resolution and the inevitable economic boom that follows.


This is principally due to the realisation that previous experiences have indicated that conflicts often lack significant impact on western economies and the fundamentals of the companies that operate within their borders. The S&P500 actually registered a gain of 37.3% over the course of World War Two, one of the deadliest and most widespread conflicts the world has ever seen, and while the initial reaction was overwhelmingly negative, from its lowest point in April of 1942 it rose almost continuously until the end of the war. This will provide some much-needed reassurance to investors who may have suffered losses across their portfolios since the start of this year, especially given that the West is highly unlikely to enter such a conflict and that many of its businesses are likely to remain relatively unaffected.
Conflicts, of course, cause significant disruption to monetary policy and force policy makers to rethink their assumptions and outlook for inflation and interest rates. By the very nature of the location of many conflicts (oil producing regions such as Kuwait, Iraq and, more recently, Russia) energy and commodity prices tend to rise during such times. As such, inflation often remains relatively elevated as higher energy prices offset dampened consumer spending and general economic growth. This typically leads to speculation of ‘stagflation’, a phenomenon whereby inflation remains high and economic growth remains stagnant, a less than ideal scenario for many asset classes.
However, as inflation eventually tails off (in many cases thanks to interest rate reductions) markets become ever more confident that a resolution will be found and that the environment is well suited to businesses and investment. This then creates the upward trajectory of the ‘V’ pattern often formed during periods of war, whereby traders start to turn optimistic and increasingly look at the long-term potential that markets can deliver.
The key, yet again, is to remain diversified. An investor with exposure to property, bonds, multi-asset funds and other low risk asset classes, will likely experience much lower drawdowns in the case of market turbulence (including war) than an investor fully allocated towards equities. Retaining a portion of equity exposure, however, will often help the investor’s portfolio to capture much of the upside when markets eventually rebound. Retaining a diversified allocation of assets will help to smooth out returns across a long period of time, instead of creating a ‘V’ pattern during times of stress.

This article was taken from the March 2022 issue of Market Insight. To subscribe to our investment publications, please visit
Conflict and Markets
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