Author: Jack Haxton
Every time conflict breaks out somewhere in the world, two things happen almost like clockwork: markets get jittery, and a very specific sector of industries quietly start performing very well. Understanding that cyclical pattern and how it has played out across more than a century of American history can be extremely valuable for investors right now.
The First Reaction Is Almost Always Wrong
When war breaks out, the instinct is to sell. Pull back. Wait it out. It feels prudent. History, however, tells a very different story.
Looking back to World War I, markets often drop sharply in the immediate aftermath of a major conflict. The Dow fell about 11% in the month after WWI began and dropped roughly 20% in the months following Pearl Harbor. Those initial reactions were real, but what happened next mattered far more.
After markets reopened following WWI, the Dow surged 88% in 1915 alone. By the end of the war, the market had gained roughly 43% overall. World War II followed a similar pattern as U.S. stocks delivered a positive real return of about 22% during the conflict. The Korean War saw stocks rise 19%, and during the Vietnam era, despite everything else happening domestically, the S&P 500 still produced average annual returns of around 7%.
The Gulf War in 1990 is a textbook example of how this pattern unfolds in real time. Iraq invaded Kuwait in August, and the S&P 500 dropped roughly 17% over the next two months. That was alarming if you were watching your portfolio closely, but by the time the conflict ended just seven months later, the index had recovered and was up nearly 25% from its low. One year after the conflict began, investors who held through the volatility were sitting on gains of about 9%.
Post-9/11 followed suit with a sharp initial drop, recovery within months, and gains of roughly 15% over the following year.
The consistent lesson across conflicts is this: investors who react emotionally and sell during the panic often lock in losses that patient investors avoid entirely.
Which Assets Actually Move — And How
Not all assets respond to conflict the same way, and understanding the differences is where things become particularly useful for investors.
Equities — Broad stock markets tend to be far more resilient than most people expect. Research covering major conflicts from World War II through the modern era shows that U.S. large-cap and small-cap stocks have consistently delivered positive returns during wartime, often outperforming peacetime averages. One reason is that government spending creates a relatively stable floor for corporate earnings, reducing uncertainty for analysts and investors. Interestingly, volatility during major wars has historically been about 33% lower than during peacetime, a counterintuitive but well-documented trend.
Defense & Aerospace — This sector is the most direct beneficiary of military conflict. Companies such as Lockheed Martin, RTX (formerly Raytheon), Northrop Grumman, and General Dynamics often see their order books fill quickly when geopolitical tensions rise. Defense stocks outperformed the broader market by 58% during the Afghanistan War. When the U.S. struck Iran earlier this year, RTX jumped 4.7% in a single trading session. These types of moves have been consistent for decades.
Energy — Particularly oil, is one of the assets most sensitive to Middle Eastern conflict. The Strait of Hormuz, the narrow waterway between Iran and Oman, handles roughly 20% of the world’s oil supply. Any disruption there can move prices quickly. During the Gulf War, oil prices spiked sharply before falling back once the conflict was resolved. Energy stocks often outperform early in Middle East conflicts, while consumers feel the impact at the gas pump. The larger risk is usually not a market crash, but a prolonged energy price shock that feeds into inflation.
Bonds — This one surprises many investors. Bonds, traditionally viewed as a safe haven, have underperformed their historical averages during wartime. The reason is straightforward: Governments borrow heavily to fund military operations, which tends to push yields higher and bond prices lower. Wartime inflation can compound the problem. Investors who moved heavily into bonds seeking safety during past conflicts often found themselves worse off than those who remained invested in equities.
Gold & Commodities — Gold often sees modest initial gains as investors seek perceived safe havens amid geopolitical uncertainty. However, the effect is usually smaller and shorter-lived than many expect. On the flip side, industrial commodities such as steel, coal, and other materials tied to defense manufacturing have historically benefited more from sustained military spending.
International Diversification — One important lesson from both World Wars is that investors who concentrated on a single country’s market took enormous risks. Whereas globally diversified investors generally fared much better across both conflicts. Diversification does not eliminate risk during wartime, but history shows it can meaningfully reduce worst-case outcomes.
Staying Level-Headed: What History Actually Suggests
If there is one consistent pattern in a century of market behavior during conflict, it is that emotional decisions made in the first days or weeks of a geopolitical event often look like mistakes in hindsight.
Investors who held through Pearl Harbor, the Cuban Missile Crisis, 9/11, and the Gulf War ultimately came out ahead of those who sold into the panic.
That does not mean ignoring risk — it means identifying the right risks.
History tends to reward the calm and punish the reactive. In an era of constant news alerts and a media environment designed to provoke immediate reactions, staying level-headed may be one of the most financially valuable decisions an investor can make.
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