Do you know how markets respond to war? Since the end of the Cold War, there has been a decrease in large-scale wars. However, interstate wars have seen an increase, primarily due to ethnic, religious, or political disputes. Major powers such as the US don’t engage in direct conflict, but they often support one side in the conflict, turning it into a proxy war.
This has been the case for the ongoing war between Russia and Ukraine and, most recently, the war between Hamas and Israel. How do these wars and other conflicts in the Middle East or with North Korea affect the stock market in the US? The nature of the war will affect various commodity prices, such as oil and energy, as well as certain sectors in the stock market.
Investor confidence and market volatility are substantial contributing factors. Let’s find out more about wars and their effects on Wall Street.
Table of Contents
- How Markets Respond to War Affects Investor Confidence
- How Markets Respond to War Affects Commodities
- How War Affects Stock Market Sectors
How Markets Respond to War Affects Investor Confidence
Every war is different, and the stock market will react accordingly. The immediate effects of war on the stock market are negative. We have plenty of historical examples to look at, such as WW1, WW2, Russia – Ukraine, and Hamas – Israel. Investors aren’t geopolitical experts and can’t predict the outcome of a conflict. However, once a broad understanding of the war’s impact becomes apparent, markets typically rebound. Until then, there is:
- Increased uncertainty: investing during a period of uncertainty isn’t easy. When a war or a conflict that can influence the stock markets breaks out, the immediate reaction is negative. Investors often liquidate some positions, resulting in a short-term market dip.
- Market volatility: price fluctuations are much greater, and it becomes more difficult to trade.
- Economic disruptions: war can disrupt supply chains. With the Russia – Ukraine conflict, we saw the price of oil, wheat and other commodities increase as a result of many broken supply chains. More on this below.
- Sector-specific impacts: certain stock market sectors will greatly benefit from war, such as the military-industrial complex. More on this below.
Let’s look at how markets respond to war during previous conflicts.
The World Wars
In 1914, the DJIA and S&P indexes didn’t exist yet. So, how markets respond to war may have been different. However, the New York Stock Exchange (NYSE) experienced an initial decline but recovered very quickly, with increased volatility and fluctuations. When the US entered the war, stocks continued rising. After the war, an extended period of growth was in place called the Roaring Twenties. Some stocks quadrupled in value!
When WW2 began in 1939, the same negative reaction occurred. However, by the end of the war in 1945, the DJIA was up 50%, which is an average of 7% per year. Innovation and creativity fueled many companies in the US, even though millions of people were dying across the ocean.
Modern Day Wars
Russia – Ukraine
How markets respond to war when Russia invaded Ukraine in February 2022, the S&P and DJIA indexes fell by more than 7% in the following weeks. By March, they recovered but never reached their end-of-2021 high. The war is still ongoing, with many nations involved. The stock market never incurred any substantial losses despite inflation across the globe and many disturbed supply chains.
Hamas – Israel
Most recently, on October 7th, an ongoing conflict between Hamas and Israel took a darker turn. When the markets opened on Monday, October 9th, the S&P and other major indexes sank briefly but recuperated rapidly as if nothing happened. Since then, there have been many ups and downs as the public and countries have taken opposite sides as the violence escalates.
What does all this teach us? Since its first days, the stock market has seen multiple waves of bad news. Investors learned to react, but not disproportionally. With time, the severity of these negative news, no matter how alarming, has had a lesser effect on the stock market.
Investors know that stocks will recover, and there is no need to panic in the long run. Today, I feel like it would take a nuclear war or an asteroid to wipe out our civilization for the stock market to collapse completely.
How Markets Respond to War Affects Commodities
Two commodities have seen their price fluctuate more than any other ones during wars and conflicts: oil and gold. How markets respond to war can make you money.
Historically, the price of a barrel of oil has consistently been influenced by wars and regional conflicts. Trouble always follows major oil producers in the Middle East, in Venezuela and Russia. When there’s an issue, oil prices will increase due to supply uncertainties. In 2022, when Russia faced sanctions, oil prices surged. Earlier this month, the conflict between Israel and Hamas caused the price of oil to rise from $83 per barrel to $87.
If you trade oil futures, you must understand the correlation between conflict and oil. Futures trading is much riskier, but the gains can be much higher. The losses can also be much more devastating. You can trade oil futures on the Chicago Mercantile Exchange (CME). We have a Futures Trading Guide to get you started or to help you successfully trade any futures.
The same logic applies to the price of gold, but for different reasons. Throughout history, a period of conflict has led investors to liquidate some of their stock market holdings and turn to gold. This happened during the 2008 recession, at the start of COVID-19, when Russia invaded Ukraine, and when the conflict between Hamas and Israel escalated most recently.
Gold is often sought after in times of economic or geopolitical crisis. It has a history of maintaining its value or appreciating during periods of uncertainty, as investors flock to it as a safe haven asset.
Gold futures can be as tricky as oil futures but can earn you just as much. Before diving into futures trading, make sure you understand all the risks and that you are properly educated to trade successfully.
How War Affects Stock Market Sectors
The US is home to many arms and defense companies that have a history of profiting from war, which will affect how markets respond to war. These companies have contracts with various government agencies to supply the US and its allies with weapons.
When a war erupted between Russia and Ukraine, the US began selling billions of dollars of weaponry to Ukraine, and war stocks quickly gained some momentum. As soon as the conflict between Hamas and Israel intensified, the same companies’ stocks gained in value. As sad as it is, war is very profitable for the US and its war machine. Here are the companies that can be a good investment during a time of war or conflict.
Lockheed Martin Corp (NYSE: LMT)
Lockheed Martin develops missile systems, fighter jets, and new and advanced military and aerospace technology. The company is currently trading near an all-time high stock price, and there is still plenty of room to grow.
In the weeks following Russia’s invasion of Ukraine, Lockheed Martin’s stock price jumped by more than 10%. The same price action happened as soon as the world learned that the conflict between Hamas and Israel had taken a new turn. When a major conflict that somehow involves the US happens, Lockheed Martin is a good short-term option for quick gains. It is also an excellent long-term investment. Especially given how to markets respond to war.
Northrop Grumman Corp (NYSE: NOC)
Northrop Grumman is also one of the world’s biggest weapons manufacturers and military technology providers. Its stock price is also nearing an all-time high as we watch how markets respond to war. Just like with Lockheed Martin, there is still room to grow.
Northrop’s stock price also increased when news broke about the conflicts, but the stock didn’t perform as well as Lockheed Martin’s in the last few years.
General Dynamics Corp (NYSE: GD)
General Dynamics is the world’s 5th-largest defense contractor in the world and in the US. War is good for business. When conflicts erupt, how markets respond to war is to show gains immediately. However, those gains are usually short-lived. In the last five years, it gained much less than Lockheed Martin or Northrop Grumman.
How War Affects the Stock Market Final Take
The world would be a better place without wars or conflicts. Unfortunately, today’s reality is far from peaceful, so we watch how markets respond to war. As an investor, you can profit from war in many ways.
Trading oil and gold futures can be very profitable but very risky. As for stocks, war stocks usually follow regular patterns when we learn about the conflicts. These investments aren’t very ESG, but the stock market doesn’t discriminate when it comes to gains.
If you want to learn more about how to profit from the stock market, head over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.