How do wars affect financial markets historically?

The short answer

The intuition that war means falling stock markets is half-right at best. Initial shocks are typically sharp and disorderly, but the historical record shows markets often recover faster than headlines suggest, and sometimes outperform peacetime baselines once the conflict drags on.

The reason is that wars usually trigger massive fiscal expansion, defense procurement, and a reallocation of capital toward sectors that benefit from the conflict — even as other sectors suffer. The aggregate index hides enormous sector dispersion.

What complicates the picture is that the real driver is not the war itself but how policymakers respond to it: monetary financing, price controls, capital controls, or none of the above produce very different market regimes.

→ New to macro shocks? Macro-financial regimes framework

What the data shows

Long-run historical data on US equities during major conflicts (Goetzmann, Jorion, NBER Working Paper 29837) shows a recurring pattern of sharp initial moves followed by full recoveries.

The numerical record (NYSE/Dow Jones/S&P historical archives, NBER WP 29837):

• WW1: NYSE closed for 4+ months in 1914, Dow down 34% from pre-war peak at reopening
• WW1: Dow gained 88% in calendar year 1915 — the highest single-year DJIA return ever recorded
• WW1 full duration: Dow up 43% from war start to Armistice (Nov 1918)
• WW2: Dow rose nearly 10% the trading day after Hitler invaded Poland (Sept 1939)
• SPADE Defense Index 2022: +8.6% vs S&P 500 -19% — a 28-percentage-point relative outperformance

The exception that nuances this: WW1 was the only major US-involved conflict producing a net negative real return for equities, largely because it coincided with the Spanish Flu pandemic and unprecedented price controls. So 7 of 8 — not 8 of 8.

→ Dataset: S&P 500 historical returns

Why it happens — the macro mechanism

Several channels compound to explain why equity markets have generally absorbed war shocks better than war narratives would suggest.

Channel 1: fiscal expansion as earnings catalyst. Wars typically trigger deficit-financed defense spending. WW2 raised US federal spending from 9% to over 40% of GDP at peak. This spending flows directly into corporate revenues — defense, manufacturing, raw materials, energy. The fiscal multiplier of government spending works in reverse of recession dynamics.

Channel 2: lower volatility despite higher uncertainty. The NBER “war puzzle” — Cortes, Vossmeyer, Weidenmier (2022) — documents that stock volatility falls during major US conflicts. Once defense contracts are awarded and government becomes the dominant buyer, earnings become unusually predictable compared to peacetime cyclicality. This contradicts the intuitive prior that war = uncertainty = volatility.

The size of fiscal commitment matters more than the war itself, which is why some “wars” barely register in markets while others reshape regimes.

Channel 3: sector dispersion masks the index. Aggregate returns hide massive within-market reallocation. Defense, energy, basic materials surge; consumer discretionary, travel, financials may suffer. Sector rotation is more important than market direction during conflicts.

Synthesis by regime. In wars where the United States stays neutral but supplies belligerents (1914-1917, early WW2), US equities tend to surge as exports rebuild industrial capacity. In wars where the US is fully belligerent and imposes wartime controls (1942-1945, Korea), equities perform decently in nominal terms but real returns depend on inflation regime. In proxy or limited conflicts (Vietnam, Gulf War, post-2022 Ukraine), the impact is mediated mainly through commodities and defense procurement — broad indices barely react after the initial shock.

Markets do not price war; they price the fiscal and monetary response to war — which is often more bullish than the conflict is bearish.

→ Framework: Geopolitics and macro regime transmission

What it means for different economic actors

Savers exposed to broad equity indices have historically been better served by holding through war shocks than by exiting — but the experience varies massively across conflicts. WW1 destroyed real savings via inflation; WW2 only partially.

Investors who treat wars as binary risk-on/risk-off events typically miss the sector dispersion that defines actual returns. Defense, basic materials and energy historically lead; long-duration assets and consumer discretionary lag.

Pension funds and long-horizon allocators face a different question: not how to trade the war, but how to position for the post-war regime — typically marked by elevated debt, higher inflation, and structural policy shifts.

A common error is to assume that geopolitical risk = market risk. The data documents that geopolitical events frequently coincide with market drawdowns but rarely cause them; the underlying macro regime usually does most of the work.

Practical observation

Go deeper

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Frequently asked questions

How quickly do markets typically recover from wartime shocks?

Historical recovery times vary widely. The Korean War (1950) saw a 2-month recovery. WW1 took 13 months from the NYSE reopening low to a full recovery. The Russia-Ukraine 2022 shock to global equities was reabsorbed within roughly 6 months for the S&P 500, though European indices took longer due to energy exposure. The pattern depends much more on the policy response than on the conflict itself.

Why is wartime volatility actually lower than peacetime volatility?

This is the “war puzzle” documented by NBER Working Paper 29837 (2022). Once a war economy stabilizes, government becomes a predictable major buyer through defense contracts, fiscal multipliers boost demand, and earnings dispersion narrows. Counter-intuitively, the uncertainty premium investors demand for unknown peacetime cycles is often higher than the premium demanded during a war with clear fiscal commitments.

Are defense stocks reliable beneficiaries of conflicts?

The data shows mixed results. The SPADE Defense Index gained 8.6% in 2022 versus -19% for the S&P 500, a 28-point outperformance. But the Israel-Hamas conflict starting October 2023 had only local effects on Israeli defense companies, with limited spillover. The pattern documented is that broad-based, prolonged conflicts with sustained procurement commitments benefit defense names; short conflicts or those without major arms package decisions do not.

Last updated — 29 May 2026