The Uncomfortable Truth of How War Affects the Markets

The first sirens started blaring at 6:35 a.m...

It was the first warning that an attack was coming. Rockets began raining down, battering central and southern Israel.

On October 7, Hamas – the terrorist group that controls the Gaza Strip – fired more than 2,000 rockets into the country. But this was more than an aerial assault. Hamas invaded Israel by air, land, and sea...

Fighters killed civilians indiscriminately. Hamas is now holding more than 200 people hostage – many of whom were taken captive in the first attacks.

Israel has declared war. As of today, just a month after the assault began, the death toll on both sides is in the thousands. I'm sure you've seen the ongoing news coverage.

War is always tragic. That's by far the most important concern. It affects all of us as human beings. But from an investment standpoint, war also raises other fears and doubts.

What will be the downstream effects? Will this war spiral into a larger global conflict? Will the geopolitical world – and, thus, the economic world – change as a result?

We can't know the answers for certain. But you should know one thing as an investor... The market doesn't always work the way we expect. And that matters when it comes to these financial worries.

Today, I'll share a bit of the uncomfortable truth about how war affects the markets...

When violence erupts, it makes sense to pause and question the downstream ramifications. This crisis has already shaken the global community. Every day, most of us are reading headlines on how it might unfold.

The dispute between Israel and Palestine has stretched for more than half a century. So while we can't predict what's next, we have plenty of history to draw on, unfortunately.

As investors, we can use that history to see how this kind of conflict affects the U.S. markets... and for how long.

The results might surprise you. In short, when fear and uncertainty touch our lives, we tend to expect them to weigh on stocks as well. But looking back, that hasn't happened in times like these...

Events like this – when Israel has launched a military campaign on Gaza – have happened four other times in the past. The last time was in 2021. That conflict began on May 10 and lasted just 11 days.

The U.S. market flinched on the news at first. The S&P 500 Index was down more than 2% the day the news broke.

But the decline didn't last. Instead, stocks rallied through the end of the year and into the eventual January 2022 peak. The overall gain was nearly 20% in less than a year.

It was a similar story during the larger 2014 Gaza War. This was a much longer and more deadly campaign. The fighting began on July 8 and lasted 50 days.

What happened to U.S. markets? That time, stocks didn't dip when the news first broke – although they did decline in the months that followed. However, a little less than a year after the conflict began, stocks were nearly 10% higher. Take a look...

U.S. stocks actually moved higher by the end of that conflict. And despite a fall in the weeks after it ended, the uptrend continued over the following year.

But this pattern didn't just happen twice. We also saw a rally in 2012. That time, the operation started on November 14 and lasted eight days. Once again, U.S. stocks held firm on the news. They climbed 35% over the next year.

Finally, the first time the pattern played out was during the 2008 to 2009 Gaza War...

That conflict began on December 27, 2008 and lasted 23 days. The financial crisis had entered full swing. So U.S. investors were getting a double dose of fear... And the market had plenty of reasons to fall besides the war.

Still, surprisingly, stocks rallied in the days following the start of the war. And despite the market's inevitable slide to the March 2009 bottom, stocks were up nearly 30% a year after the conflict began.

This has happened time and time again. It isn't just the Middle East, either. We can go back through history and find similar examples in other parts of the world.

Stocks rallied after the start of the Vietnam War... the Gulf War... the Iraq War... and Russia's invasion of Crimea.

All of this points to a brutal truth... While a new war always causes uncertainty, it usually doesn't lead to a market crash.

Today's conflict could still spill over into a larger global struggle. If that happens, it could lead to declines in the stock market. But that seems unlikely, given how many similar conflicts we've seen in the past and what followed.

This crisis deserves our concern. But history shows it doesn't mean the U.S. market will fall... And as investors, we shouldn't expect financial panic from here.

Good investing,

Brett Eversole

Further Reading

"It's OK to watch the markets closely," Steve Sjuggerud writes. "But you can't allow that to creep into your investment decisions." Every day, most of us absorb a constant stream of urgent news. That doesn't mean you should let fear guide your trades – use this simple tool instead... Read more here.

One way to avoid panic as an investor is to prepare for many possibilities... not just one. With a long-term perspective, you can focus on preserving – and compounding – your wealth over time. Here are five steps to building a prepared portfolio that can weather any storm... Learn more here.