Is war good for the stock market

Shares and the war

Key question: How do I protect my assets?

Ultimately, it's not about anything else. Be it war, recession, inflation. The question always remains the same: How do I protect my assets? How can I keep the value? The question is as old as the concept of wealth itself and is therefore not tied to the age of the stock market.

It is fair to say that people have pondered this question for centuries. Not much came out of it. Otherwise everyone would know what to do by now. The question is really not that easy to answer, because the circumstances threatening wealth are fundamentally different. There is ultimately 4 very big threat scenarios: war, hyperinflation, depression and arbitrary government.

The last point in particular does not make it easy to find a panacea. Wherever you move your wealth, the state can thwart your plans. Anyone who wants to hedge against hyperinflation with gold could be confronted with a gold ban. That wouldn't be the first time. Because state violence can be completely arbitrary and unpredictable, I don't want to focus on it at all. The only thing that helps here is to diversify your wealth across state lines.

Hedging against inflation is no longer a feat these days. You can do that without gold. Many analysts are convinced that stocks are a good alternative even with inflation. Gold and stocks indirectly protect against inflation. Those who like it more directly can buy inflation-indexed products or even trade inflation futures directly.

What remains are the two major factors of uncertainty War and economic depression. It's no wonder that stocks don't exactly bullish during an economic downturn. Inflation is also rarely a problem in times of economic downturn. So gold only helps to a limited extent. The simplest thing in the world applies here: Cash is king.

When it comes to war, things get more complicated. Historically, there is enough data to start an investigation. However, if you compare share prices, wars and recessions, it quickly becomes apparent that the picture is not that clear. The first graph shows the development of US stocks on a nominal and real basis as well as the price index. The blue background marks times of war. Only the major wars are listed here. The United States was at one war or another almost continuously until the beginning of the 20th century.

The red markings show the longest recessions and depressions in US history. War and recession often coincide closely. They rarely overlap 1 to 1. The temporal proximity is very clear, however. This also makes it very difficult to study the effects of war and recession on stock prices.

To make matters worse, the price movements are inconsistent in those periods when recession and war do not overlap. At the beginning of the 19th century (1st Barbary War) the prices rose by 100%. In the war that followed, they fell by 30%. In the 1850s there were several wars at once. The courses gave way by 55%. During the Second World War, on the other hand, prices initially fell, but then rose again significantly.

It is also important to distinguish between real and nominal rates. In nominal terms, the corrections were quickly ironed out during the wars and recessions. In nominal terms, prices stagnated during the US-Mexico border war; in real terms, prices fell significantly.

That leads me to the first guess what made Warren Buffett put his trust in stocks in wartime too: he was looking at nominal prices. As an investor, you didn't do that badly. However, this has little to do with preserving wealth. Ultimately, it all comes down to purchasing power. So you should keep an eye on the real development. This is where stocks are often weak. It was very rare to win. This is closely related to the course of economic development and war. Often times, wars started during a period of economic weakness. That then gave the economy a boost and ultimately led to high inflation. Due to increased demand, stocks were able to gain for the time being. The gains were then eaten up again by the high inflation, especially since a post-war recession often occurred after the end of the war.

Historical all-round blow

France is relatively high on the list of countries that have very extensive war histories. The picture is a little clearer than in the USA. Shares rose in real terms more frequently (70% of the time) than they fell during wartime. The revolution of 1848 shocked the stock markets violently. Shares also only survived the First World War by halving. Interesting is the rapid increase during the Second World War and the crash of 60% afterwards.

The most recent wars and interventions are not included in the graph. France's involvement anywhere in the world is de facto permanent. However, very few would call it a war.

The history of Japan is interesting. Japan was represented in relatively few conflicts in the 20th century. Above all, the First and Second World Wars should be mentioned. Both arguments tended to have a negative effect on stocks. Last but not least, the bankruptcy of Japan after the Second World War also hit the economy considerably.

In the industrialized countries, wars on their own territory were a while ago. This cannot be said of all countries. India is in an ongoing conflict with Pakistan. There were direct disputes here in the 1980s and 1999. In the late 1980s, India was a party to the Sri Lankan civil war. One cannot see a direct, negative effect.

It looks different in South Africa. There were at least significant declines in the markets during armed conflicts. Overall, however, the stock market did not behave significantly differently in the times before and after. Times of armed conflict can hardly be distinguished from the other periods.

The thing about war and shares is not very clear. The effects are very country-specific. In nominal terms, the declines were often of limited duration. Without taking inflation into account, stocks held up well during wartime. In real terms, the chances of a stable value are 50 to 50. No clear tendency can be seen here. On the one hand, war pushes the economy, on the other, it usually leads to high inflation and a post-war recession in which stocks lose again. Maintaining value through stocks in wartime is more of a coin toss than a strategy. It seems much more important to hedge against inflation. Whether stocks really do what many always claim is another story. I will look into the question of stocks as protection against inflation in a separate article.

I wish you success

Clemens Schmale