In recent years, we have once again faced war scenarios that we believed had been left behind forever. For this reason, the question of whether it is advisable to exit financial investments during a war is undoubtedly legitimate.
Here we will not enter into the moral judgment of war itself: it is obvious that it is bad news for humanity. Our focus here is mainly on the effect of war on financial markets.
Although markets occasionally incorporate noise coming from geopolitics, they are not necessarily a faithful reflection of it, just as they sometimes diverge from the real economy.
What really matters to the market?
- Low uncertainty
- Companies generating profits
- Inflation not being excessive
- Abundant liquidity
A few months ago, we wrote an article analyzing why bad news does not always cause markets to fall. Even when a piece of news is considered “bad” by common sense, if it does not affect the dimensions mentioned above, the market tends to ignore it.
A war can create uncertainty and push inflation higher, of course, but wars often arrive at the end of a period of uncertainty and, paradoxically, markets may see them as a way to reach some form of equilibrium more quickly.
Previous cases
Let’s briefly look at what happened during major conflicts in recent decades: the Gulf War, the Iraq War, the war in Ukraine, and the Gaza war.
The table shows the performance of the S&P 500 index in the 6 and 12 months following the start of each conflict. As we can see, the average return six months after the outbreak of a war is above 9%, and the one-year return exceeds 17%.
The only exception is the period following the war in Ukraine, which coincided with the post-pandemic inflation shock and the subsequent aggressive cycle of interest rate hikes by central banks.
Of course, the past offers no guarantee about the future, but what we can learn from these data is that, in general, it does not pay to sell when a war breaks out.
This does not mean that the announcement of a war cannot cause the market to fall. Investors should therefore always maintain a portfolio that matches their ability to tolerate fluctuations.
The collective knowledge of markets
It may sound strange, but markets possess a kind of collective knowledge that is greater than that of individual investors. In other words, they tend to anticipate what will happen in the future. They start rising when news is still overwhelmingly negative and start falling when everything seems to be going well.
For this reason, investors who leave the market and wait for everything to be “calm” before re-entering will probably find prices already 20% or 30% higher.
Let’s take a practical example from the pandemic. It is not a war, but the complete shutdown of the economy can be compared with one of the most feared effects of a conflict.
The stock market bottomed on March 23, 2020. Those who remember that period know that there were still no good news, no vaccine prospects, and no reopening in sight.
Anyone who waited until November 9, 2020 — the day when Pfizer and BioNTech announced preliminary results from the phase 3 trial of their mRNA vaccine with over 90% effectiveness — would have bought the S&P 500 index at prices already 60% higher.
When news begins to improve, a significant portion of the market rebound has already occurred. Waiting until you “feel safe” essentially means buying at much higher prices.
At the time, we used the Covid period to demonstrate that even during such extreme times it is impossible to perfectly time the market.
Interventions by central banks and governments
There is another aspect to consider. Since the great financial crisis of 2008, central banks and governments have intervened more and more frequently to support markets.
Today it is difficult to imagine scenarios like that of 1929 because central banks and governments tend to intervene immediately to inject liquidity or prevent excessively deep declines.
Returning to the pandemic example, the complete shutdown of the economy would have had catastrophic effects without government support.
Governments intervened with massive expansionary fiscal policies that supported the economy, while central banks injected liquidity into the system. This caused inflation to rise, but inaction would likely have led to a painful recession.
Therefore, today central banks and governments are always willing to prevent sharp market collapses, even during wars.
Conclusion: it is not worth selling during a war and waiting for peace to reinvest
From a historical perspective, it is not worth adopting a panic-driven selling strategy at the beginning of a war and waiting for “complete peace” before reinvesting, because markets tend to price in uncertainty quickly and recover, often with significant gains over the following 6–12 months.
For intellectual honesty, we must recognize that this is a limited sample mainly related to conflicts that were “peripheral” to the global economy. A global conflict could have a very different impact.
In any case, a globally diversified portfolio aligned with your risk tolerance and time horizon is designed to withstand episodes of high volatility, and impulsive decisions are always discouraged.
In summary, history suggests that panic selling when a war breaks out is almost always a bad idea, while staying invested with a portfolio consistent with your goals is the most rational option.
