Broker Check

What If This Is World War III?

May 02, 2024

Russia and Ukraine are still at war. Any further escalation could materially impact food and energy supplies to Western Europe and create ripple effects across the globe.

Israel and Iran have engaged in direct military conflict for the first time since the 1980s. Given Iran’s nuclear ambitions and Israel’s proximity to vital trade routes, Middle East instability risks far more than energy prices.

Then there’s China and Taiwan. If China were to invade, the implications could be substantial. Taiwan manufactures most of the semiconductors used in cars, robotics, missile defense systems, and anything else that relies on circuitry. The world cannot operate without semiconductors.

Add it all up, and it’s understandable why some investors fear World War III. So, let’s see how stocks have historically performed during times of war.

The chart below breaks out the last five major wars for the U.S. The blue bars represent the annualized return during each conflict, and the orange bars are the annualized volatility.

While the data set is admittedly small, there appears to be no consistent pattern for return or volatility. World War II had higher returns with less volatility than long-term averages (far right), while the Iraq War exhibited the opposite.

Perhaps the only observable trend is that these wars had little to no lasting impact on stock prices. For example, the Gulf War’s heightened volatility is more likely due to the recession in the early 1990s. The Iraq War was sandwiched between two of the worst recessions ever, which explains the lower return and higher volatility. World War II triggered massive government spending, and one lesson we’ve learned since 2020 is that when the government spends, stock prices soar higher.

That’s not to say stocks are immune to wars. The third column in the table below shows that prior to the Russian invasion of Ukraine, the stock market's one-day return at the onset of each conflict listed was negative. Furthermore, the fifth column lists the max drawdown during each conflict, and some were pretty ugly. For example, the stock market fell over 20% after Pearl Harbor.

However, look at the one-year returns in the fourth column. Not only are they mostly positive, but some are massive. It’s as if traders panicked, prices crashed, and irrationally low stock prices attracted long-term investors. If this phenomenon sounds familiar, it’s because it’s identical to every other crisis that has hit the stock market since the beginning of time.

Simply put, wars impact the stock market no different than any other shock. Traders panic, stocks go on sale, patient investors bargain shop, and eventually, stocks return to trading on fundamentals because they remain intact.

The bottom line

By most measures, the Ukraine situation is getting worse. Thousands have lost their lives, cities need to be rebuilt, billions more are about to be spent, and Russian politics seem to demand further escalation. But has the stock market even noticed?

Think about it. When was the last time stocks sold off because Russia advanced deeper into Ukraine’s territory? Can you recall a time when stocks rallied on the news that Ukraine held ground? What about Israel and Hamas? Has there been any impact at all?

Wars and other conflicts have been unfortunate constants throughout history, but they rarely cause American consumers and businesses to tighten their purse strings. This is important because 88% of our economy is spending money (70% consumer and 18% business)1. Hence, recessions happen when spending slows dramatically, and World War III probably won’t cause most of us to cancel our Amazon Prime memberships.

The bottom line is that while uncertainty may temporarily shape asset prices, one final chart below shows the stock market’s overall resiliency can help maintain a long-term perspective. Investing $10,000 in the S&P 500 in 1970 is worth $2.6 million today for an average annual return of 10.8%2. Let’s hope we don’t see another World War, but if it happens, there’s no reason to think half-century trends like these are doomed.





1 The Federal Reserve

2 Bloomberg. As of 3/28/2024



This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.