Stock markets are not reacting to war as one might expect


There were a few wild trading sessions along the way, but overall it didn’t make much of a difference. If you just looked at the charts and nothing else, you would probably conclude that not much is happening in the world.

For anyone who cares to take a look at the historical records, this shouldn’t be too surprising. An article published this week by the National Bureau of Economic Research in the United States, authored by Gustavo Cortes, Angela Vossmeyer and Marc Weidenmier, points out that there is a long-established “war puzzle” in the performance of the American stock market. .

First identified in the 1980s, and yet true ever since, stocks are 33% less volatile during times of major conflict than in times of peace, although movements in inflation and commodity prices be much more extreme than at other times.

Even during the major world wars this was true, and it was also true for the more recent wars in Iraq and Afghanistan. Admittedly, this only measures Wall Street trading, and the United States suffered little physical damage in these wars. Even so, the results hold for all major indices outside of specific war zones.

There is much debate about why this is true. The latest research suggests that increased defense spending makes the market much more stable, primarily because revenues from huge government contracts are so stable and predictable that companies can earn healthy margins and, perhaps more importantly, forecast their income for several years to come.

Admittedly, defense contractors aren’t as important to the index as they used to be (although that could change very quickly – companies like Ford and General Electric weren’t defense contractors in the beginning of World War II, but quickly switched to military production). Even so, it still makes a difference and helps create a more stable market.

More generally, there is very little reason to believe that this will do any real damage to corporate profits. Russia is only the 11th largest economy in the world and with the recession that the war will inevitably create, it will soon be overtaken by Poland. Companies pull back, but it wasn’t a market that made a real difference to anyone, and most lost sales can quickly be made up elsewhere.

Of course, there may be some shortages as Russian raw materials disappear from the market, but that can be quickly resolved – we can be sure that Tesla technicians are working overtime to replace nickel in electric car batteries with something they can find more easily. elsewhere.

Wars are unbearably tragic for the victims caught up in the conflict, as Ukraine reminds us. But it is wrong to assume that they are necessarily bad for the wider economy. This will trigger a wave of new investment as each country scrambles to replace Russian oil and gas, either by increasing its own production or investing more in renewables and nuclear.

And it will, as so often in the past, set off a wave of innovation, as peacetime applications are found for technologies first developed with military money (at the end of this war, it seems certain that drones will be commonplace, and we may well have also learned to accept genetically modified crops).

Whether any of this is true for Ukraine and the new Cold War between Russia and the West that now seems inevitable remains to be seen. But the message of the last century of stock market history is certainly clear. We will see an explosion of volatility and commodity prices will be everywhere, but major stock markets will be very lackluster over the next couple of years – and the best thing investors can do is leave their wallets alone.


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