Wars can shock the world, but oftentimes, they don’t shock the stock market. During World War II and the Korean War, U.S. stocks rose 17% and 19%, respectively, well above the average market return of between 8% and 10%. Stocks tend to shake off downward pressure in the lead-up to wars as certainty and stimulus – such as in the defense sector – take hold once conflicts begin and stabilize.
Sticking to a long-term strategy can help investors weather volatility and prevent emotional trading in early days of conflicts, when unpredictability is often at its height. Holding through the chaos, not trying to time it, has historically delivered strong results for investors.
Stock market performance during wartime: from World War II to Afghanistan
What happens to the stock market during war? Across six major conflicts, U.S. large-cap and small-cap stocks consistently delivered positive returns, often outperforming peacetime averages. Meanwhile, bonds and credit typically underperformed, and inflation varied depending on the conflict.
The table below compares the performance of major asset classes during wartime versus long-term historical averages.
| Period | Large cap | Small cap | Long-term bonds | 5-year notes | Long-term credit | Cash | Inflation |
|---|---|---|---|---|---|---|---|
| 1926–2013 | 10.0% | 11.6% | 5.6% | 5.3% | 5.9% | 3.5% | 3.0% |
| All wars | 11.9% | 12.2% | 3.8% | 3.8% | 4.2% | 2.8% | 3.7% |
| World War II | 16.9% | 32.8% | 3.2% | 1.8% | 3.0% | 0.3% | 5.2% |
| Korean War | 18.7% | 15.4% | -1.1% | 0.7% | 0.3% | 1.5% | 3.8% |
| Vietnam War | 6.4% | 7.3% | 1.9% | 4.7% | 2.7% | 4.9% | 4.1% |
| Gulf War | 11.7% | -1.2% | 12.5% | 12.5% | 12.1% | 7.0% | 4.7% |
| Afghanistan* | 7.8% | 9.0% | 1.4% | 0.7% | 1.5% | 1.2% | 2.1% |
| Iraq* | 9.8% | 10.0% | 4.9% | 2.5% | 5.6% | 1.7% | 2.5% |
How has the market performed when the U.S. enters a war?
The lead-up to a conflict often generates significant market uncertainty, which depresses prices. But in most cases, the market rebounds quickly.
Here’s how the S&P 500 performed in the three months before and after the beginning of major U.S. wars:
| War | 3 months before start | 3 months after start | Total performance (annualized return) |
|---|---|---|---|
| World War II | -12.3% | -9.0% | 16.9% |
| Korean War | 0.6% | 10.3% | 18.7% |
| Vietnam War | -1.5% | 3.6% | 6.4% |
| Gulf War | 9.8% | 18.2% | 11.7% |
| Iraq War | -2.2% | 13.6% | 9.8% |
| Afghanistan War | -11.4% | 10.4% | 7.8% |
Prewar jitters depress prices before the first shots are fired. The S&P 500 fell 12.3% in the 3 months before WWII but returned 16.9% over the course of the entire war.
Postannouncement rebounds are common. Stocks rose by more than 10% in the three months after the start of U.S. wars fought since the Gulf War.
Surprise wars hit harder. Events that suddenly drew the United States into wars, like Pearl Harbor and the start of the Korean War, triggered immediate market drops. The Dow Jones dropped 3.5% in the day after Pearl Harbor and 5% the day after the Korean War began. But in the case of the Korean War, markets rebounded fairly quickly.
Which stocks perform best during war?
Three long-term studies show that defense and defense-related companies consistently outperform during wartime or periods of heightened geopolitical risk, particularly immediately after U.S. intervention.
A study of the five largest U.S. defense companies from 1990 to 2018 found that stock prices rose significantly after announcements of direct U.S. involvement in conflicts, though gains were short-lived and often reversed within months. Budget announcements related to defense spending in geopolitically volatile periods were also correlated with positive returns for those defense companies.
A National Bureau of Economic Research study that covered 1937 to 2017 found that higher military spending resulted in lower stock volatility for defense companies and related industries such as steel, coal, textiles, and food. Wartime defense contracts provided stable revenue streams, which reduced uncertainty about future profits and made earnings easier to forecast.
An analysis of 75 global defense stocks from 2014 to 2023 showed a strong correlation between defense stock performance and geopolitical risk, particularly during events like Russia’s annexation of Crimea and later invasion of Ukraine. Defense stocks moved most relative to the market in the medium term when international tensions were heightened.
Why markets fluctuate around wars
Investor anxiety tends to peak as tensions simmer and countries inch closer to war. Markets have experienced sudden sell-offs in response to surprise events that drew the U.S. into conflict, such as the bombing of Pearl Harbor and the invasion of South Korea. In those cases, investors had less time to price in the risk of conflict and reallocate their capital accordingly. Once a war becomes more certain, investors can view it as a risk, which can be modeled and therefore priced, according to research on market performance during wartime by the Swiss Finance Institute.
As the contours of a war become clearer, investors can predict and react to which sectors – such as defense and aerospace – may benefit from wartime government spending or new resource demands, the Swiss Finance Institute found.
Conflicts aren’t the only events that drive markets. The broader macroeconomic environment during wartime matters as well, which is highlighted by an analysis of market performance during wars by Invesco. For example, the 2008 recession drove markets downward during the Wars in Afghanistan and Iraq but had no connection to those conflicts.
In short, the Swiss Finance Institute found that markets tend to fall in the lead-up to war and immediately after surprise conflicts but often rally once war begins. The reason: The uncertainty before war creates more perceived risk than the war itself. Even messy or prolonged wars can bring enough clarity to ease investor anxiety and stabilize markets.
What investors should remember during wartime
Markets don’t fear war; they fear uncertainty. Across a century of U.S. conflicts, stocks often dipped before fighting began then rallied once the outcome looked clearer.
The historical data on stock market performance during U.S. conflicts shows:
- Stock markets often dip in the lead-up to wars but rise after they begin.
- Small-cap stocks tend to outperform during conflict.
- Surprise wars trigger sharper declines than anticipated ones.
Wars are wrought with unpredictability and chaos, especially in early days, which the market can reflect in its performance. But investors are encouraged to stay the course and take a longer view. In peace and wartime, history favors those who hold.
Sources
- CFA Institute (2007). “What Happens to the Market if America Goes to War?”
- Constantin Gurdgiev, Robert Marra, and Andrew Mulhair (2019). “The Budgets of Wars: Analysis of the U.S. Defense Stocks in the Post-Cold War Era.”
- Heliyon (2024). “Investigating the effect of geopolitical risk on defense companies’ stock returns.”
- Invesco (2022). “Markets in War Time.”
- National Bureau of Economic Research (2024). “Stock Volatility and the War Puzzle: The Military Demand Channel.”
- Swiss Finance Institute (2011). “The War Puzzle: Contradictory Effects of International Conflicts on Stock Markets.”
