Does war affect the stock market?

10/09/2022

Strangely enough, if we look at history, the effect of wars on stocks is relatively small.

In the first months of the First World War, the Dow fell by 30%, after which the market was closed for six months. When the markets reopened, prices rose by 88%. Over the entire war period, 1914-1918, prices rose by 43%.

In the Second World War, the rates rose by about 50% between 1939 and 1945. In fact, the Dow Jones index rose 10% when Hitler invaded Poland. In the Vietnam War from 1965 to 1973, prices rose by 43%. In the Korean War from 1950 to 1953, they rose 60%.

These are a number of examples that show that on balance there is not much effect. Certain events do have major short-term effects. One of the biggest was the attack on Pearl Harbor. The Dow fell 20% in the following period and it took almost a year to recover. Even when North Korea invaded South Korea, the market first fell 13% and then recovered within three months. Below are some graphs showing the effect of events:

The course of a major event on the Dow Jones index from 1935 to 1950.

The course of a major event on the Dow Jones index in the period 1941-1944.

If we make this objective again, research shows that the volatility of the stock market in times of war is lower than the average. See these results:

Stock market volatility during wars in the different categories.

This is viewed from the 'good' side of the wars. If you invest in the country of the aggressor, things look different. For Germany, this was the picture of the Second World War. The market has even been closed for a few years. At the reopening, the market took an extreme plunge. The stock market in Russia has also been closed in the meantime, and the losses there too are as high as 50%.

Course of the German DAX during the Second World War in the period 1930 to 1950.

Predicting crashes

That is, of course, the golden egg of investing. Fortunately, that is very simple. You read all the headlines and analyse historical data. Then you pick a date and a price and look: the bottom has been predicted. 

Predicting crashes often also has a huge advantage: sometimes you're right. Then you are really immortal for a while and people see you as the new guru. You can strengthen that status by getting it right again a few years later.

The serious investor can do something else. Buy more if markets fall! It is better to buy twice cheaply just before a bottom, than twice much too late and you have to buy at a higher price.

There are only three markets conditions:  expensive, cheap or about fair. As an investor in individual stocks, you constantly have to move your holdings from expensive to cheap. Then you are indeed always a little too early or a little too late and your energy you put into predicting the top or bottom is better spent in analysing a company.

"Games are won by players who focus on the field, not the ones looking at the scoreboard." - Warren Buffett

Conclusion

You should invest regularly and not worry too much about crashes, corrections and dips. Yet that is easier said than done.

Some experienced stock market professionals tumble over each other to tell you to keep calm. That all sounds very brave, but the reality is different. If you find it difficult to remain calm when the market falls, you are not a bad investor, but all the more a person with emotion. Fighting with your feelings is a useless battle. What you need to do is focus on the actions you take. That is extremely important because it makes you a successful investor.

The great thing is that if you continue to base your actions on ratio, your panic will come back less strongly when the market falls. You have a basis through which you have proof that you are going to do the right things.

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