Investment Warrior Report Archive Article

Stocks and War

With tensions running high about a possible conflict with Iraq, many analysts are concerned about these events influencing the stock markets in a negative way. Over the last century, the United States has been involved in 5 major wars. Just what were the results of the Dow Jones Industrial average in the one year prior to the onset of hostilities and the results one year after the beginning of war? Did war make a major difference in the stock market or was it a non-issue in terms of market results?

There are lessons that can be learned from this historical perspective that I believe most investors will find surprising! Here are the historical results....

(Event /Return for the year before the onset of hostilities / Return in the one year after the onset of hostilities) Note: Does not include dividend return.

WWI 4/2/17 +3.59% / -21.42%

WW2 12/7/41 -11.15% / -1.41%

Korean War 6/25/50 +28.09% / +14.67%

Vietnam War- 8/4/64 +19.33 / +6.14

Gulf War- 1/16/91 -6.82% / +29.52%

Average 5 Wars +6.61% / +5.5%

Because of the fact that this is only a series of 5 events, the small difference between the prior year returns and year after returns can be considered statistically insignificant. An interesting fact is that the average annual compound return for the DJIA since January 1, 1900 has been 4.78%. This is actually lower than both the "before and after" figures in the above chart. This can make us wonder whether or not war and rumors of war are actually a benefit for the market, although the number again is still statistically close to the 5 war average and is probably insignificant as well.

The monthly return both before and after initial involvement in a conflict were also inconclusive. The 5 war average had a return of 1.74% in the month before and +1.98% in the month after the start of hostilities. Again, too small a difference to draw any serious insights.

The conclusion of the matter is that based on the history of the last 103 years, war has not been a significant factor in market performance both one year before and one year after the onset of hostilities.



Copyright 2003 Lussenheide Capital Management