Analysts Split on Wartime Investing
Market analysts are offering conflicting advice on how to navigate geopolitical shocks. Investor Logan Weaver advises doing nothing, arguing history shows equities recover post-conflict. In contrast, Maverick Equity Research notes that U.S. stocks have historically been positive during major wars, presenting potential buying opportunities.
Historically, U.S. large-cap and small-cap stocks have delivered positive returns across six major conflicts, often outperforming peacetime averages. During World War II, the Dow Jones Industrial Average gained 50%, and it was up nearly 60% during the Korean War. Markets tend to fear uncertainty more than conflict itself; pre-war jitters often depress prices before fighting begins. For instance, the S&P 500 fell 12.3% in the three months before World War II but returned 16.9% over the course of the entire war. Post-announcement rebounds are common, with stocks rising over 10% in the three months after the start of U.S. wars fought since the Gulf War. This counterintuitive performance is often linked to massive increases in government spending and fiscal stimulus that accompany war efforts. Global defense spending saw its steepest annual rise since the Cold War in 2024, largely driven by the conflict in Ukraine. Defense and energy sectors have historically seen gains during periods of geopolitical instability. One study of the five largest U.S. defense firms found stock prices rose significantly after announcements of direct U.S. involvement in conflicts. Since the 2022 invasion of Ukraine, the S&P Aerospace & Defense index has surged by nearly 90%. However, sector performance can be unpredictable. During World War II, the top-performing U.S. industry was surprisingly printing and publishing, followed by alcoholic beverages. Meanwhile, sectors like steel, chemicals, and aircraft—though critical to the war effort—generated lower returns than expected. The threat of conflict can impact markets more than the conflict itself. Research distinguishes between "geopolitical threats" (GPT), like military buildups, and "geopolitical acts" (GPA), the actual events. Studies have found that the threat phase is more relevant for risk perceptions and asset pricing, as markets are forward-looking. While stocks have shown resilience, other asset classes have not fared as well. Across major conflicts, long-term bonds and credit have typically underperformed their long-term historical averages. Cash and short-term notes have also seen lower returns, while inflation has generally been higher.
