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How the Modern Stock Market is Affected by War

A look at investor attitudes to war and uncertainty in the modern era.

Coming up on the 75th anniversary of the end of World War II, the world is now focused on the possibility of an armed conflict between the U.S., its allies and Iran. So far the U.S. has spent an estimated $6.4 trillion on wars post 9/11, and going by the president’s latest tweets, it appears willing to keep spending if things escalate. But there is little clarity of how far Iran, its economy already struggling and its leadership deeply unpopular, is willing to go to avenge the death of its top general.

Security experts are weighing in, and only time will tell, but investing experts are sending out reminders that past wars didn’t push U.S. equities lower long-term.

LPL Financial said in a note that stocks have largely shrugged off past geopolitical conflicts. “As serious as this escalation is, previous experiences have indicated it may be unlikely to have a material impact on U.S. economic fundamentals or corporate profits,” said LPL Financial Chief Investment Strategist John Lynch. “We would not be sellers of stocks into weakness related to this event, given stocks have weathered heightened geopolitical tensions in the past.”

Source: LPL Financial
Source: LPL Financial.

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War Economy Preparedness (Its all upto the Stars and Mandala’s)

What Is a War Economy?

War economy is the organization of a country’s production capacity and distribution during a time of conflict. A war economy must make substantial adjustments to its consumer production to accommodate defense production needs. In a war economy, governments must choose how to allocate their country’s resources very carefully in order to achieve military victory while also meeting vital domestic consumer demands.

KEY TAKEAWAYS

  • A war economy takes place when a country is at war and it affects its capacity to produce and distribute goods.
  • Governments in a war economy must decide how to allocate resources to account for its defense needs.
  • War economies generally use tax dollars for defense spending

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INVESTMENTS DURING TRADE WARS OR WAR TIMES

Barton Biggs, the well-known former Morgan Stanley strategist, asks an interesting question at the beginning of his new book, Wealth, War & Wisdom: “How do you preserve wealth in times when the Four Horsemen are on the loose?” (By Four Horsemen, Biggs refers to “pestilence, war, famine and death.” See also Revelation 6:8.) Indeed answering this question was his motivation for writing the book. As an amateur historian, WWII buff and investor, he wondered: What’s the point of making money if you cannot preserve it? His book shows how, uncannily, “The equity markets in the principal contenders [in WWII] — the United States, Britain, Germany and Japan — identified the monumental, epic turning points in the war with uncanny perception,” even as individual experts or lay observers did not. Biggs notes that the U.S. market “turned forever” around the Battle of Midway in late May of 1943; that the British stock market bottomed — get this — just before the Battle of Britain in 1940; the German market reached its high-water mark as Hitler’s army attacked Russia (which marked the German war machine’s first big key losses) in December 1941; and Japan’s market peaked in 1942 — despite the tightly controlled pro-war propaganda published by the Empire’s media.

But what are the takeaway lessons? For protecting wealth, stocks are a better bet than bonds (real property only gets confiscated). While gold and jewelry can raise a little “mad money,” as Biggs says, they are still “problematic.” Over the long run, equities are the place to be — even in countries that are losing a war, because historically, even they have managed to beat inflation. Biggs’ advice: Index, and ignore just about everything else. Here is an excerpt from Wealth, War & Wisdom.

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