The stock market sold today.
Oil prices rose.
Bond yields rose.
Almost everything fell; stocks, bonds, emerging markets, gold, Bitcoin, seemingly everything except the dollar.
Investors are trying to understand what the war in Iran means for markets.
Higher inflation? Higher borrowing costs? Higher energy prices?
How long will this conflict last? What are the geopolitical consequences? Will it all end soon?
I have no idea. This is not my lane. I’m not sure anyone knows.
The stock market’s reaction to these events may be irrational.
I wrote about The relationship between war and the stock market In 2020:
In the six months following the start of World War I in 1914, the Dow index fell more than 30%. As the war essentially brought business to a halt and market liquidity was almost completely depleted, it was decided to close the stock market that year. This lasted six months, making it the longest period in history. Making up for lost time, the Dow rose more than 88% after reopening in 1915, which remains the highest annual return on record for the DJIA. In fact, from the beginning of the war in 1914 until the end of the war in 1918, the Dow increased by more than 43% overall, or about 8.7% annually.
World War II had a similarly counterintuitive market outcome. Hitler started the war by invading Poland on September 1, 1939. When the market opened on September 5, the Dow was up almost 10% that day. When the attack on the US naval base at Pearl Harbor occurred in early December 1941, stocks opened down 2.9% the following Monday, but it took only a month to regain those losses. When Allied forces invaded France on D-Day, June 6, 1944, the stock market hardly noticed. The Dow rose more than 5% in the following month.
From 1939, when World War II began, to late 1945, the Dow index increased by more than 7% per year, or 50% in total.
So, during the two worst wars in modern history, the US stock market rose a combined 115%.
The Korean War began in the summer of 1950 when North Korea invaded the South. This conflict ended in the summer of 1953. During that period, the Dow index increased by 16% on an annual basis, or almost 60% in total.
US troops were sent to Vietnam in March 1965. The Dow would finish the rest of that year up nearly 10%. When the last of the US troops withdrew from Vietnam in 1973, the stock market was up almost 43% overall at the time, or just under 5% per year.
I wrote about how the markets reacted to this situation. previous geopolitical crises additionally:
The Cuban Missile Crisis brought the world to the brink of nuclear war in October 1962. The conflict lasted 13 days, from October 16 to October 28, 1962. During this two-week period, the Dow remained surprisingly calm, losing just 1.2 percent. For the rest of that year, the Dow would gain more than 10 percent.
President John F. Kennedy was assassinated in Dallas a little more than a year later. The next day the market opened at 4.5 percent. Stocks rose more than 15 percent the following year, 1964.
In the three weeks following the Gulf War in the summer of 1990, stocks fell 13.3 percent. From July to October of that year, the S&P 500 fell 19.9 percent, but this also coincided with a recession.
The attack on U.S. soil on September 11, 2001 sent stocks falling sharply, falling nearly 15 percent in less than two weeks following the tragedy. At that point, the economy was already in the middle of a recession and stocks were still falling out of the tech bubble, but within a few months the stock market had recouped all its losses since 9/11.
The USA invaded Iraq in March 2003. Shares rose 2.3 percent the next day and finished the year with gains of more than 30 percent from then on; but this followed the end of a brutal bear market.
Just like markets, predicting the length and severity of a battle always seems easier with the benefit of hindsight.
From this chart Annex A It shows how the stock market performed over the 12 months following major geopolitical events dating back to the Korean War:
Most of the time the stock market rises, but sometimes declines are also valid here.
As always.
Further Reading:
The Relationship Between War and the Stock Market
