Stocks and wars





“BUY when the cannons roar. Sell when the violins are playing.” This stock market wisdom comes from Carl Mayer von Rothschild (1788-1855), partner in the Frankfurt banking and trading house, M.A. Rothschild & Sons. “Be fearful when others are greedy and be greedy when others are fearful,” Warren Buffett also said.

The basic idea behind these quotes is that of counter-cyclical investing. Investors try to generate returns by buying stocks when sentiment and the outlook are gloomy, and then selling them when the stock market is rosy.

But it also means that shortly before or at the beginning of a war is a good time to start investing. Because at this time, in theory, there should only be short-term price declined and, shortly after the outbreak of the military conflict, prices should rise again. But how do stock exchanges react in the event of war? Here are some examples.

First World War: In the six months after the outbreak of the First World War in 1914, the leading US index, the Dow Jones, fell by more than 30 percent. As a result, the stock exchange was closed for half a year. The Dow Jones then rose nearly 90 percent in 1915, and more than 40 percent overall by the end of the war in 1918.

Second World War: When Germany invaded Poland on September 1, 1939, the Dow Jones rose by 10 percent the next trading day. On the other hand, there was a small dent after the Japanese attack on Pearl Harbor. It went down almost 3 percent. Overall, however, things went up during the Second World War. In 1945, the Dow Jones was 50 percent higher than in 1939.

Terrorist attacks of September 11, 2001: The attacks in the US also shook the stock markets, which fell by almost 15 percent in the days that followed. However, the losses were made up within a few months.

Iraq War: On March 20, 2003, the US, together with the “Western Coalition”, attacked Iraq to overthrow Saddam Hussein. The stock exchanges rose 2.3 percent the following day, and the Dow Jones recorded a gain of more than 30 percent over the course of the year.

Investors hate uncertainty. And Vladimir Putin is currently causing a great deal of uncertainty with his invasion of Ukraine, because he is destroying a decades-old peace order. In response, the US, in co-ordination with the European Union (EU) and other allies, imposed tough sanctions on Russia, including on the largest banks and the Russian central bank. However, according to statements by Western politicians, the consequences for the country’s own economy are not yet foreseeable.

Global stock indices have fluctuated wildly since Russia invaded Ukraine. It looks like the markets are repositioning themselves for this new, old world that includes a return of war and inflation in Europe.

Let us look at the MSCI World - the global stock index. It has fallen by 7.4 percent since the beginning of the year. However, individual sectors such as oil and gas, but also aviation and defense, have increased significantly over the same period.

Wars, at least for the stock market, do not seem to be poison. One could also say that they do not play a major role in the development of the stock market, but that economic issues in particular influence prices. At least the markets do not always react to geopolitical events first with a discount and then with rising prices. The bottom line is that it is difficult, if not impossible, for investors to find the perfect entry and exit times.

Now, it is important to have a balanced investment in the stock market. Anyone who invests worldwide and relies on the large, well-known global stock indices will not feel it nearly as badly as, for example, Russian-dependent company investors. One should not look at the next few weeks here, but at the next few years.

Investors are now primarily protecting themselves against longer-lasting inflation, i.e. currency devaluation. The rising gold price shows that many investors are currently fleeing to this so-called safe haven, which is typical in times of crisis.


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