The Fog of War and Your Investments

Market performance during times of war

Written by Jeff Helms

The financial world is complex and constantly changing. Those changes can impact our clients and their plans for the future. As the firms founder and Managing Partner, making sense of these changes is my job. We try to simplify communication on market dynamics to make it meaningful and useful for our clients.

February 24, 2022

What happens to investments during times of war?

As things heat up between Russia and Ukraine, we thought it might be helpful to offer some historical perspective on how the stock and bond markets have performed in past conflicts. To be sure, the situation in Ukraine is serious, and any time sovereign powers rattle their sabers at one another, the investment markets experience a period of volatility. The question is, if the conflict evolves into outright war, what happens to the prospects for investments?

It’s helpful to look at the playbook from past wars to answer this question. Historically, stock markets experience a period of increased volatility as conflicts unfold, and we’re certainly seeing that now. The amount of volatility is directly related to the amount of uncertainty present. 

Second, we typically see increased energy costs, particularly where global oil and gas suppliers are involved in the conflict. Since Russia supplies a meaningful amount of both to Europe, you can also check that box. Oil prices are hovering around $94 per barrel and look set to move higher if the conflict intensifies.

Third, we historically see capital shift to safe havens – namely gold, bonds, and currencies of stable countries. While it’s too early to tell, we’ve begun to see this occur with a rise in gold prices and more purchases of government bonds globally.

While the Ukraine conflict seems to be following the historical playbook, we think the more meaningful question investors should be asking is this: What does history tell us about investment performance over the entire cycle of past conflicts?

Mark Armbruster, CFA, who studied conflicts between 1926 and 2013, provides the above chart.

While the chart is a bit busy, stay with us for a moment. Armbruster was interested in determining whether markets experienced more volatility than usual during wartime. The top blue bar reflects the market’s performance (both risk and return) from 1926 to 2013. Various asset classes are included. Except for the Gulf War, he found that markets experienced less volatility during conflicts.

In addition, it’s helpful to look at the returns achieved during each conflict. Stock returns were better than average with less volatility. Bond returns were below average. Becoming more conservative was not the right answer.

Our Takeaway: We should expect daily market fluctuations (both up and down) to continue as long as uncertainty is present, but history clearly reflects that staying the course has rewarded patient investors handsomely during past geopolitical conflicts.

If you have any questions or concerns, please don’t hesitate to call.