Stock Market Returns Following Military Conflicts

Prior to today’s military attack on Ukraine by Russia, I had been receiving reports from various strategies and investment firms about the impact of war on stocks. The common theme is a short-term downturn followed by higher prices.

Calamos Wealth Management’s Investment Strategy Group put together the most comprehensive tables I’ve seen of geopolitical conflicts dating back to World War II. The average total drop (aka drawdown) in the S&P 500 index from the event date to the bottom was 4.8%.

Averages, of course, are influenced by the upper and lower ends of the data. The Calamos table—which is shown at the bottom of today’s commentary—includes the attempted assassination of past President Ronald Regan in 1981, the London subway bombing in 2005 and the killing of Iranian general Qasem Soleimani in 2020. Following these events, the S&P 500 incurred total drawdowns of –0.3%, 0.0% and –0.7%, respectively. 

The large-cap index’s total drawdown reached double-digits in percentage terms just four times. The index plunged 19.8% in response to the 1941 attack on Pearl Harbor. The start of the Korean War in 1950 was followed by a 12.9% drop. A 16.9% correction followed the Iraq invasion of Kuwait in 1990. Finally, an 11.6% drop in the S&P 500 occurred after the 9/11 attacks in the U.S.

Outside of these events, the S&P 500 incurred the equivalent of a pullback (a drop of between 5% and 10%) just twice. The index incurred a 6.6% drawdown after the Cuban Missile Crisis in 1962. The 1968 Tet Offensive in Vietnam was followed by a 6.0% drop.

On average, the S&P 500 bottomed 21 days after the event date and took 45 days to recover. Two events skew these numbers. The large-cap index went 143 days following the Pearl Harbor attack before it finally bottomed. The S&P 500 went 71 days after the Iraqi invasion of Kuwait before bottoming.

Both times, there were other macro factors at play. Following Pearl Harbor, Europe remained engaged in a full-scare war while Japan was continuing military strikes in the Pacific and in eastern Asia. At the same time, the U.S. was continuing to deal with the aftermath of the Great Depression and the subsequent 1937–1938 recession. In 1990, the U.S. economy fell into a recession. The recession was brought on, in part, by higher oil prices and rising interest rates.

On the other hand, the S&P 500’s reaction to the start of the Yom Kippur War in 1973 was short, with the index bottoming within five days. Twelve months after the October 6, 1973, event date, the S&P 500 was down 40.9%. A combination of the oil embargo, crashes in several stock markets (especially London) and stagflation were all among the contributors to the drop.

The typical pattern has been for the S&P 500 to have an initial reaction to a geopolitical event and then move past it. The average length of time between the event date and the full recovery from a “reaction drop” has been 66 days in total.

At periods of six months or longer, other factors have influenced the market’s direction. While some of the factors stemmed from or were related to the conflict, the conflict by itself has not tended to be a lasting driver.

As I write this, there are still several known unknowns pertaining to Ukraine and the extent of sanctions against Russia in response to the attack. Russia is a big supplier of natural gas to Europe: The Wall Street Journal says, “Russian energy accounts for about 40% of the gas the EU imports.” Russia is also a big supplier of several other commodities. Higher commodity prices have a ripple effect across global economies. There can also be fallout from financial sanctions due to companies having direct or indirect exposure to Russia. Obviously, any time there is a military conflict, there is the risk of it worsening or spreading. We hope this does not happen.

There are various other factors at play that could influence the direction of the global equity, fixed-income and commodity markets. The coronavirus remains a threat with the potential for new mutations to occur. Supply chain issues persist. Many central banks around the globe have raised or are considering raising rates. Here in the U.S., the Federal Reserve is expected to begin raising rates in a few weeks. At the same time, the global economy continues to open up and supply chain issues could lessen as the year progresses.

As investors, we don’t get to choose the financial market conditions we live through, much less the geopolitical conditions we live through. Systematic risk (the risk of doing anything with your money) never fully goes away. But the bigger risk to most investors’ portfolios is behavioral in nature—making big portfolio decisions based on short-term events instead of staying focused on achieving longer-term financial goals.

Source: LPL Research, S&P Dow Jones Indices, CFRA, Bloomberg. Past performance doesn’t guarantee future results. The illustrated returns are reflective of the performance under the stated timeframe for the S&P 500 Index and beginning with the “event date.” The S&P 500 index is a stock market index that tracks performance of 500 U.S.-based large-cap companies from various sectors. It is widely considered a gauge of investor sentiment and its returns reflect the state of the American economy.