How do markets behave during war?
With our military engaged in Iran, there is no shortage of questions.
How long will this last? Will more countries get involved? Will it spread beyond the Middle East? How much destruction will be caused? How much will it cost? How many lives will be lost?
Given the weightiness of those issues, forgive us for spending time on the far less important issue of what it all means for our investments. Our mission is to be “A Sanctuary From The Noise®” and there are few periods noisier than wartime. So, let’s cut to the chase.
There is only one correct answer to the above questions: No one knows. There is no shortage of opinions, of course, but no one can truly know.
War might be the pinnacle of uncertainty, but this kind of uncertainty is far from new. History is marked by war continuously somewhere on the planet. There is plenty of precedent to refer to even if the exact details of this conflict are new. The details of every other prior conflict were new then as well.
There is plenty of precedent to refer to even if the exact details of this conflict are new. The details of every other prior conflict were new then as well.
The behavior of the stock market during war times is characterized by above-average volatility – both dramatic drops and dramatic rises. Overall, stocks have risen over the duration of wars.
When World War I began in 1914, the Dow Jones Industrial Average (DOW) dropped about 30% over the first six months. The trauma to the business environment was so deep, the stock exchange was actually closed for several months! However, by the end of the war in 1918, the Dow was up over 43% from the war’s beginning. That’s an 8.7% annual average.
From the time Hitler invaded Poland in 1939 to when the Japanese surrendered in 1945, the market rose 50%, or a bit over 7% annually. Markets rose 60% over the three years of the Korean War, an average of more than 16%. Markets even rose 43% over the course of the protracted Vietnam War. That was a near 5% annual rate despite that time including a terrible recession and the oil crisis.
The point is neither that war doesn’t matter nor that it is somehow good for markets. Rather, war hasn’t altered the best approach to being in the market despite ongoing news that suggests an overhaul might be in order.
The only clear actionable pattern applicable to the stock market in wartime is that despite the volatility, the disruption to the global economy, and the anxiety war creates, staying diversified, patient and disciplined has paid off. Historically, people who have left the market rarely come back at the right time because they wait for good news. By the time there is good news, they missed many of the best days of the recovery.
…despite the volatility, the disruption to the global economy, and the anxiety war creates, staying diversified, patient and disciplined has paid off.
This is easier to see in hindsight of course. Living through the periods just listed in real time was something entirely different. World War I was so broad and saw the use of so many new weapons, when it ended it was dubbed “The war to end all wars.” A mere 20 years later, an even bigger war began. Many people still remember ducking under their desks at school in drills in case of a nuclear attack during the Korean War and Cold War years. The Vietnam era was tumultuous as well and loaded with disturbing news.
Guessing the market’s moves based on news has been a fool’s errand. Remember 1968? The year started with the North Vietnamese launching the Tet Offensive. Over the summer, Martin Luther King and Robert Kennedy were assassinated. Police and Illinois National Guardsmen were shown on national television clubbing and tear-gassing hundreds of anti-war demonstrators during the Democratic National Convention. By winter there were more U.S. troops in Vietnam than in any other year of the war. 1968 was one of the worst news years yet the S&P 500 was up 11.1%.
It’s not always like that, of course. Bad markets have followed bad news, but markets have proven to be highly resilient. The process is complex, chaotic even, but it works. The main reason why markets recover is because businesses are adaptable. Profits may become harder to earn, but the profit motive never goes away. Businesses of all sizes change to adapt to new realities. Some will fail, but others will succeed – and over time, businesses become more valuable and the value of their shares reflect that increase.
No one can reliably predict geopolitical events, recessions or market corrections with enough accuracy to warrant massive changes to portfolios designed for a client’s goals. Adjustments often need to be made, and we will make them as things unfold. Significant overhauls are only warranted when a client’s personal circumstances materially change what they need their money to do for their family. Good portfolios will shrink when markets decline but they are designed to facilitate being patient.
Most goals you care about are years into the future, and those that are short term are simply not fatally reliant on the stock market. No matter what happens, try to remember your holdings are built so you can be patient.
When uncertainty appears and disturbing news comes out, it is natural to be concerned. These are also the times when diversification, patience and discipline are most needed. Planning gives us a process for making thoughtful adjustments, not emotional reactions or fear-based decisions.
In the News…
Tamayo Interviewed for “Psychology of Strength” podcast
Ron Tamayo, CFP® EA was interviewed by host Tom Moschner for Moschner’s “Psychology of Strength” podcast that features guests who have experience overcoming adversity. Ron, a first generation American, shares what he learned from his family which immigrated to the United States from Cuba in 1961 and from entrepreneurship as a co-founder of Moisand Fitzgerald Tamayo, LLC. The interview is set in a garage in a nod to his car racing hobby which has taken him to tracks around the U.S. like Sebring, Daytona, Road America, Watkins Glen, Virginia International Raceway, Road Atlanta, Circuit of the Americas and more. The entire video spans more than two hours but is very interesting but is also time stamped to make it easy to get to the parts of most interest to the viewer.
If you are a member of an organization in need of a personal finance speaker, we are happy to talk with your group’s organizers about helping out at no cost.
Fitzgerald Visits Legislators & State Officials in Tallahassee
Charlie Fitzgerald, CFP® recently traveled to Tallahassee with members from the Financial Planning Association of Florida to speak with legislators and State officials. This trip marks 19 years of advocacy at Florida’s Capitol. The focus of this trip was supporting funding to help teachers deliver the new financial literacy requirement for all public high school students starting in 2027, impacting over 100,000 students per year in Florida.
The group visited 19 State Senators, 11 State Representatives, members of the Senate Banking & Insurance Committee, senior staff with the Department of Education, Kerry Finegan and staff at the Office of Financial Regulation, senior staff at the Department of Financial Services, lobbyists for the Florida Council on Economic Education, Wilton Simpson and staff at the Department of Agriculture & Consumer Services, and Chris Spencer, Director of Policy and Budget for Governor Ron DeSantis.
Notable
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- Deadline to file Free Application for Federal Student Aid (FAFSA), for prior academic year
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