How Wars Impact Stock Markets

The war between Russia and Ukraine has entered its 13th month with no end in sight. It’s quite sad since all that is needed to end the war is for the West, Russia, and Ukraine to honor the Minsk Agreement. To me, it’s clear this conflict will escalate even further while entangling the US, Europe, Russia, and even China. 

There are two parts to this article. Part I is a timeline depicting important events in Ukraine. I hate to admit some events do not make the USA look like a knight in shining armor. Regardless, there is plenty of blame on both sides. Part II shows how US stock markets can react in times of war. I took US-based Dow Jones historical information from WWI, WWII, the Vietnam War, and the Gulf War to find insights.  

Since I love history I hope you find this research informative along with how major events can impact you. If you see incorrect details below please reach out. 

Part I

I’ll start off with a brief history of the region. Many different ethnic groups have ties to the area besides Russians and Ukrainians. This includes Tatars, Slavs, Caucasians, Turkic, Armenians, Indo-Aryan, Germanic, and more. 

Secondly, there is a long bloody history in this region. Many of these groups have conflicted over the centuries. The list of battles and wars waged could fill this entire page. We all know humans hold grudges for something that happened hundreds of years ago as if it were them. 

Third, did you know the regions currently under conflict have historically been mostly Russian? In fact, the areas of Donetsk, Luhansk, and Crimea were part of the Russian Empire for centuries. They were allocated to Ukraine in 1954 by the Soviet Union for administrative purposes so they weren’t even technically Ukrainian territory, it was handed to them. 

Fourth, did you know Ukraine did not print, nor mint, any money until World War II? The first known Ukrainian currency was minted with help from Germany since Hitler promised ethnic Ukrainians their own country if they became allies. 

A lesser-known fact is that Kiev is the original home to the “Rus”. A Mongol invasion decimated the city leaving only the ancient Golden Gates which resulted in many civilians relocating north toward present-day Moscow. 

The timeline starts in 1954 which helps paint a modern-day picture that has A LOT going on. 

• 1954: Regions of the Soviet Union including Crimea are transferred to Ukraine for administrative reasons by Khrushchev(here).  
• 1991: Ukrainian region declares independence after the dissolution of the Soviet Union. Also, Russia is invited to join NATO but declines fearing it will look like a US puppet. 
• 1994: Budapest Memorandum was signed where Ukraine agreed to give up its nuclear arsenal which at the time was the world’s 3rd largest in an attempt to create stability in the area amongst civil unrest and ethnic cleansing allegations. Security pledges are made by the USA, UK, and Russia.
• 1997-1999: Multiple important financial deals occur during this time. The results include the collapse of US-based Long Term Capital Management, Hermitage Capital, and Boris Yelstin’s $7 billion dollar loan from the IMF(originating from the Bank of New York). Each involves heavy allegations of fraud, embezzlement, and more by American and Russian parties. The Magnitsky Act is born from these events. Boris Yeltsin places Putin in power and steps down.   
• 2000: Bill Clinton and Vladimir Putin discuss Russia joining NATO. 
• June 7, 2014: The Obama administration installs an interim provisional government in Ukraine which is unelected and led by Petro Poroshenko. Like many Ukrainian politicians, he has a history rife with corruption and tax evasion(here). The Ukraine government under Poroshenko immediately sends troops to attack the Donbas region for wanting to separate from Ukraine after its own revolution. There are allegations of ethnic cleansing occurring in the region from both sides. Also in 2014, Crimea is annexed by Russia. 
• 2015: Germany, France, Ukraine, and Russia sign the Minsk Agreement which created a ceasefire among all the separatist movements within the Donbas, Luhansk, and more. It also was supposed to provide a framework for these regions to decide on independence. 
• September 2017: Ukraine outlaws the Russian language in schools across the country despite the fact eastern provinces primarily speak Russian. My understanding is the law left alone other areas primarily speaking Hungarian, Romanian, and Polish.    
• 2019: Zelensky is elected after promising to end corruption, halt Ukraine’s civil war, and make peace with Russia which was arming separatist movements.
• February 20th, 2022: Vice President Harris at the Munich Security Conference announces Ukraine should join NATO. White House press release (here).
• February 23rd, 2022: Zelensky announces that Ukraine should rearm itself with nuclear weapons in direct violation of the Budapest Memorandum.
• February 24th, 2022, Putin mobilizes troops into the Donbas province.
• March – April 2022 Biden admin approves military aid packages amounting to over $113 billion which is nearly double Russia’s annual military budget. Besides military equipment, it also includes civilian relief, and to pay Ukraine’s government workers’ pension obligations.
• November 2022: FTX Crypto exchange collapses with allegations of fraud and connections to Ukrainian government money laundering US aid money.
• December 2022: Angela Merkel acknowledged the Minsk Agreement was negotiated in bad faith and intended only to allow Ukraine time to build its army under NATO supervision(here).

Part II

Now I’ll detail how the US stock market typically reacts in times of war. For brevity, I am excluding the bond and real estate markets. I chose charts with a 10-year time span which provides insight into the years leading up to a war and the aftermath. 

World War I began on July 28th, 1914. As you see the market started to decline in the months preceding the war and accelerated quickly the week before as it traded down to 80.76. By the 28th shares opened sharply lower closing at 76.28 for a 5.5% weekly loss. 

A few days later the US Government actually shut down all financial exchanges. They were allowed to re-open on December 14, 1914. This move was intended to preserve the wealth of ordinary citizens and to protect financial institutions from collapse. However, it instilled more uncertainty. When the market finally re-opened it plunged 25% all the way down to 56.76 as institutions and individuals alike scrambled to get their money out.

To the dismay of many the Dow Jones more than doubled in the next 2 years hitting 110.15 by 1916. The Dow Jones continued to be volatile even after the war ended. By 1920 it was back to setting new highs.

World War II generally is considered to have begun in the west when Germany invaded Poland on September 1st, 1939. However, Japan invaded China in 1937. For America, it officially starts on December 7, 1941 when Japan bombed Pearl Harbor. 

There is a similar pattern to WWI. The Dow Jones starts to decline months in advance as uncertainty builds. However, when Germany invades Poland the Dow advanced nearly 24% in two weeks as capital poured into the USA.

The Dow rally is short-lived and starts to decline as it becomes clear the US will get involved. In July 1941 the USA seized Japanese assets, imposed sanctions, and initiated the infamous oil embargo which accelerated tensions. 

When Japan attacks Pearl Harbor the Dow initially rallies for a few days to recover some losses. It then declines into April 1942 until hitting a low of 92.69 The Dow concludes the war with a 130% rally through May 1946. 

The Vietnam War was not global in scale, and more so impacted the neighboring Asian countries. This time the Dow reacts differently. 

Despite tensions increasing for 2 years leading up to the war, the Dow Jones rallied until early 1966. That is when the USA increased its ground troop count to 185,000 in March 1966 as part of the PROVN study. Only then did markets begin to sell off. Clearly, other factors were weighing heavily into investors’ decisions this time around as known tensions had little impact

Starting with the early 1966 highs the Dow Jones moved violently up and down. Ultimately it drops 36% when it finally reaches a 639.10 wartime low on May 25th, 1970. It took another 32 months for the Dow Jones to rally 67%  when it finally peaked at 1,067.20 on January 11th, 1973. A few weeks later on January 27th the North, South Vietnamese, and the USA reach a ceasefire agreement. 

In the roughly seven years from the war’s unofficial start in 1966 to its end in early 1973 the Dow increased a measly 70 points. Investors get slapped in the face again as the Dow enters another bear market in 1974. Even going back to the start from the Tonkin Gulf in 1964 through the end of 1974 investors endured 10 years of volatility with almost no change in their stock portfolios value.   

It’s as if the market itself tried to say the war wasn’t worth it.

The Persian Gulf War started on August 2, 1990, when Iraq invaded Kuwait. Since the war only lasted 7 months the Dow Jones didn’t have much time to do much else other than drop initially which is expected. 

The Dow’s total decline was approximately 22%. Afterward, the Dow continued its steady climb up through the 90s which many investors recall as the best decade ever.

It will be interesting to see what the charts will eventually show us about the current situation. Only time will tell!