When Two Tribes Go To War

Another week, another war, and there are now 50 global armed conflicts involving some 90 countries. The current level of instability in the world is the highest since World War II. The performance of the stock market during times of war is complex and varies depending on the conflict. However, some historical patterns can help investors navigate these times of heightened uncertainty.

Markets often react negatively at the onset of conflict due to fear and unpredictability. Not surprisingly, stock markets dropped sharply on Friday, whilst oil prices rallied.  According to an economic study, a sustained $10 increase in oil prices would increase inflation by 0.4% and lower GDP by 0.4%. That would naturally throw any expectations of imminent cuts in interest rates into the long grass.

However, this initial market downturn is frequently followed by recovery once investors gain clarity on the war’s scope and expected outcomes. For example, during World War II, the U.S. stock market initially declined but later rallied. Similarly, in the Gulf War (1990–1991) and the Iraq War (2003), short-term market drops were followed by strong rebounds within months.

Clearly, defence stocks, energy companies, and staples tend to perform well in times of war. On the other hand, companies reliant on consumer spending, international trade, or stable geopolitical conditions may suffer. Having said that, it’s not like we stopped watching Netflix or cancelled our Amazon Prime subscription. In fact, long-term investors often benefit from staying invested, and rather morbidly, wars usually create buying opportunities.