What are the markets doing during wartimes?
Currently investors are seeing unprecedented uncertainty in the market. The invasion by Hamas on Israel is decreasing investor confidence and is increasing the volatility in the market. The market is already underperforming for this calendar year, as global economies are under major stress due to a few factors; persistent sticky inflation causing rates to remain high, meaning higher costs of living; falling saving resulting in less disposable income and changing consumer behaviour.
So, what should investors do? And how does the market perform?
So How Do Wars Affect Stock Market Performance?
Historically, wars have a negative impact on stock markets in the short term. The initial uncertainty and instability introduced into the economy decreases investor sentiment as the market is unsure how contagious geopolitical risk will be on the global economy. In the graph below we can see the performance of the S&P 500 index during two of the most significant wars in modern history: World War I and World War II.
As we can see from the graph, the S&P 500 index performed poorly during the two wars. The outbreak of World War I in 1914 saw the index drop by 18% in just three months. World War II had an even more significant impact, with the index dropping by 30% in the year following the start of the war. The Gulf War, which began in 1990, also had a negative impact on the market, with the index dropping by 15% in the six months following the outbreak of the conflict. It is therefore quite evident that markets react poorly to the outbreak of war, however it can be argued that these reactions are influenced by different factors.
How does the Australian market perform?
The Australian stock market has historically performed well during war events. This is because war often leads to increased government spending, which can boost economic growth and corporate profits. Additionally, war can lead to higher demand for certain commodities, such as oil and metals, which can benefit Australian companies that produce these commodities.
Recent examples:
- Persian Gulf War (1990-1991): The Australian stock market fell by around 10% in the immediate aftermath of the invasion of Kuwait by Iraq. However, it quickly recovered and rose by around 20% over the following year.
- September 11 attacks (2001): The Australian stock market fell by around 5% in the immediate aftermath of the attacks. However, it recovered within a few months and rose by around 15% over the following year.
- Iraq War (2003-2011): The Australian stock market fell by around 10% in the immediate aftermath of the invasion of Iraq by the United States and its allies. However, it quickly recovered and rose by around 20% over the following year.
- Russian invasion of Ukraine (2022): The Australian stock market fell by around 5% in the immediate aftermath of the invasion of Ukraine by Russia. However, it has since recovered and is now trading at around pre-invasion levels.
What sectors of the Australian stock market tend to perform well during war events?
It is important to note that war is a complex and unpredictable event, and it is impossible to say with certainty how the Australian stock market will perform during a future war. However, history suggests that the Australian stock market is likely to weather the storm and emerge stronger in the long run. Sectors such as defence, gold, energy, materials, and grain generally outperform. As the higher demand increases the price of the commodity market.
Gold has already jumped with Newcrest Mining up 5.90%, Northern Star Resources up 5.37% and Evolution Mining up 4.64% since Monday.
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Disclaimer: This article does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
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