How Wars Affect the Stock Market

MONEY

How Wars Affect the Stock Market
80 Years of Data — From WWII to the Middle East

By Thirsty Hippo · June 14, 2025 · 10 min read · ~2,400 words

🎯 Key Takeaways

• Stocks typically drop 5-10% when conflict erupts, then recover within 3-6 months
• Since WWII, the S&P 500 has ended higher during or after every major war
• Middle East conflicts hit markets harder because of oil price sensitivity
• The biggest risk isn't war itself — it's panic selling at the worst possible time

📑 Table of Contents

1. The First 48 Hours — What Markets Do When Conflict Erupts
2. 80 Years of Data: Stock Market During Major Wars
3. The Middle East Factor — Oil, Hezbollah, and Fear
4. Does War Actually Help the Stock Market?
5. Defense Stocks, Oil, and Gold — Where Money Moves
6. How to Protect Your Portfolio from Geopolitical Risk
7. FAQ

Missiles fly. Headlines explode. And within minutes, stock tickers start bleeding red.

Every time a major conflict makes headlines, the same question floods financial forums and search engines: should I sell everything?

If you've been watching the news lately — Israel-Hezbollah escalations, broader Middle East instability, drone strikes and retaliations — you've probably wondered: how do wars actually affect the stock market?

This is Thirsty Hippo. I've been tracking market reactions to geopolitical events for over 3 years, and one pattern keeps showing up that most people get completely wrong.

The common assumption is simple: war = stocks crash. But the data tells a much more nuanced — and frankly surprising — story.

Since World War II, the S&P 500 has recovered from every single major geopolitical shock. Not most of them. All of them. According to research from LPL Financial, the average market drawdown from geopolitical crises is roughly 5%, with recovery typically occurring within 3 to 6 months.

Does that mean war is "good" for stocks? Absolutely not. But it does mean the knee-jerk panic you feel when conflicts erupt is often the worst time to make investment decisions.

Here, I'm breaking down 80 years of data on war and the stock market — from WWII to the current Middle East crisis. We'll look at what actually happens in the first 48 hours, which sectors win and lose, and what smart investors do instead of panicking.

Let's get into it.

⚡ 1. The First 48 Hours — What Markets Do When Conflict Erupts

When a major military conflict breaks out, stock markets almost always drop immediately. This initial selloff is driven by fear, uncertainty, and algorithmic trading — not by actual economic damage. The drop typically ranges from 3% to 10%, depending on the scale and proximity of the conflict.

Here's the deal: markets hate uncertainty more than they hate bad news. A declared war with clear boundaries often causes less long-term damage than an ambiguous, escalating crisis where nobody knows what happens next.

Think about it this way. When Russia invaded Ukraine in February 2022, the S&P 500 dropped about 5% in the first week. But the actual market bottom came a month later — and it had more to do with inflation fears and Fed policy than the war itself.

The pattern is remarkably consistent across decades:

• Day 1-3: Sharp selloff (panic, headlines, algorithms)
• Week 1-2: Continued volatility as the situation clarifies
• Month 1-3: Markets begin pricing in the "new normal"
• Month 3-6: Recovery begins, often faster than expected

Why does this matter? Because most individual investors make their worst decisions during phase one — the panic phase. They sell at the bottom, lock in losses, then watch the recovery from the sidelines.

📊 2. 80 Years of Data: Stock Market During Major Wars

The S&P 500 has risen during or immediately after every major conflict since World War II. This is one of the most counterintuitive facts in investing, but the historical record is remarkably clear.

One thing that surprised me was just how consistent this pattern is. Here's the data:

Conflict	Period	Initial Drop	S&P 500 (During/After)
World War II	1941-1945	-10% (Pearl Harbor)	+50% over war period
Korean War	1950-1953	-12%	+18% over war period
Vietnam War	1964-1975	Minimal	+43% (high volatility)
Gulf War	1990-1991	-20%	+30% in 1991
Iraq War	2003	-5%	+26% by year end
Russia-Ukraine	2022-present	-5% (first week)	+24% in 2023 recovery

Sources: S&P Dow Jones Indices historical data; LPL Financial Research

💡 Quick Answer: Do stocks recover after wars?

Yes. Since WWII, the S&P 500 has recovered from every major geopolitical shock, typically within 3-6 months. The initial selloff is usually driven by panic, not fundamental economic damage. Markets have ended higher during or after every major conflict in the past 80 years.

The best part? You don't need to predict when the recovery starts. According to Fidelity Investments research, investors who stayed fully invested during the 20 worst geopolitical crises since 1940 earned significantly more than those who sold and tried to time their re-entry.

Honestly speaking, this data changed how I think about my own portfolio. My instinct during the Ukraine invasion was to sell everything. I didn't — and I'm glad.

🛢️ 3. The Middle East Factor — Oil, Hezbollah, and Market Fear

Middle East conflicts affect the stock market differently than other wars because of one critical factor: oil. The region produces roughly 30% of the world's crude oil, and any disruption — real or threatened — sends shockwaves through global markets almost instantly.

But there's a catch. It's not the fighting itself that moves markets. It's the fear of supply disruption. When Israel and Hezbollah exchange strikes, traders don't just ask "how bad is the damage?" They ask "could this spread to Iran?" — because Iran influences the Strait of Hormuz, through which roughly 20% of the world's oil passes every day.

We've seen this chain reaction play out multiple times:

• 1973 Oil Embargo: Arab nations cut oil exports → S&P 500 dropped ~45% over two years
• 1990 Gulf War: Iraq invaded Kuwait → oil prices spiked 140% in months
• 2019 Saudi Aramco Attack: Drone strike → oil jumped 15% in a single day
• 2023-2025 Israel-Hezbollah: Escalation fears → periodic oil spikes and sustained market volatility

From what I've seen so far, the current Middle East situation is particularly tricky for markets because it doesn't have clear boundaries. Traditional wars have frontlines and endgames. The Israel-Hezbollah-Iran dynamic is a web of proxies and red lines that can escalate unpredictably.

That uncertainty — more than the actual damage — is what keeps traders on edge and algorithms firing sell orders.

🤔 4. Does War Actually Help the Stock Market?

Not exactly — but the relationship is more complicated than most people think. Wars stimulate certain parts of the economy while devastating others. Government defense spending surges, manufacturing ramps up, and entire industries pivot to wartime production. Historically, this has often boosted GDP and, by extension, stock prices.

Here's why that matters: during World War II, US government spending as a percentage of GDP went from about 10% to over 40%. Factories that made cars started making tanks. Unemployment virtually disappeared. This is sometimes called the "war economy" effect — increased government spending that stimulates GDP even as destruction occurs elsewhere. The S&P 500 rose roughly 50% during those years.

But let's be clear about something. Saying "war helps stocks" is a dangerous oversimplification. What actually helps stocks is:

• Government spending increases (massive fiscal stimulus effect)
• Inflation of assets (central banks print money to fund wars)
• Resolution of uncertainty (markets hate "maybe" more than "definitely bad")

The human cost is obviously catastrophic. And for individual companies — especially those operating in conflict zones — war is purely destructive. The "war helps markets" narrative only works at the macro index level, and even then, it's really about fiscal policy and monetary expansion more than combat.

💬 What's your strategy during geopolitical uncertainty? Do you stay invested, rebalance, or move to cash? Drop your thoughts in the comments below.

💰 5. Defense Stocks, Oil, and Gold — Where Money Moves During Conflict

When war breaks out, money doesn't disappear from the market — it moves. Certain sectors consistently attract capital during geopolitical crises while others get crushed. Understanding these flows is crucial for any investor watching the headlines.

Bottom line: three asset classes have historically outperformed during wartime:

Asset	Why It Rises	Recent Example
Defense Stocks	Government contracts surge	Lockheed Martin +37% in 2022
Oil & Energy	Supply disruption fears	Oil hit $130/barrel after Ukraine invasion
Gold	Safe-haven demand	Gold surged past $2,400 in 2024

On the flip side, sectors that typically suffer include airlines (higher fuel costs), tourism (travel disruption), and emerging market equities (capital flight to safety).

I could be wrong here, but I think the current Middle East situation is creating an interesting divergence. Defense stocks have already priced in much of the tension, while oil prices remain volatile because nobody knows if the conflict will expand to directly involve Iran's oil infrastructure.

🛡️ 6. How to Protect Your Portfolio from Geopolitical Risk

You don't need to predict wars to protect your investments. A well-structured portfolio can weather geopolitical shocks without requiring you to panic-sell or time the market. Here are the strategies that consistently work, based on decades of historical performance.

Here's the deal: the best defense isn't reacting to war. It's being prepared before it happens.

1. Diversify across asset classes. If your portfolio is 100% stocks, you'll feel every geopolitical tremor. Adding bonds, gold, or real estate provides natural shock absorption. A classic 60/40 portfolio (stocks/bonds) has historically lost less than half as much as an all-stock portfolio during geopolitical crises.

2. Diversify geographically. Don't put all your money in one country's market. Global diversification means a Middle East conflict might hit your energy holdings but boost your defense sector exposure elsewhere.

3. Keep cash reserves. Having 3-6 months of expenses in cash means you'll never be forced to sell investments at the worst possible moment. This is the unsexy advice that saves portfolios.

4. Avoid leverage during uncertainty. Margin calls during geopolitical selloffs have wiped out more portfolios than the actual conflicts themselves.

💡 Quick Answer: How should I invest during a war?

Stay diversified, keep cash reserves, and avoid panic selling. History shows that investors who remain invested during geopolitical crises consistently outperform those who try to time the market. Consider small allocations to gold or Treasury bonds as a hedge.

After spending three years tracking how wars affect the stock market, the one lesson that keeps reinforcing itself is this: time in the market beats timing the market — especially during crises. The investors who do best during wartime are, counterintuitively, the ones who do the least.

❓ Frequently Asked Questions

Q1. Do stocks go up or down during war?

A. Stocks typically drop 5-10% in the first days or weeks of a conflict, then recover within 3-6 months. Since WWII, the S&P 500 has ended higher during or after every major war. The initial drop is usually a fear-driven overreaction, not a reflection of fundamental economic damage.

Q2. What stocks do well during war?

A. Defense contractors (Lockheed Martin, Raytheon, Northrop Grumman), energy companies (especially oil producers), and gold-related assets tend to outperform during wartime. These sectors benefit from increased government spending, supply disruptions, and safe-haven capital flows.

Q3. Should I sell my stocks if war breaks out?

A. History strongly suggests no. Panic selling during geopolitical crises has consistently been the wrong move. According to LPL Financial research, markets recover from geopolitical shocks within an average of 3-6 months. Staying invested through the volatility has historically outperformed panic selling every single time.

Q4. How does the Middle East conflict affect US stocks?

A. Middle East conflicts primarily affect US stocks through oil prices. When tensions escalate — such as Israel-Hezbollah exchanges or threats to the Strait of Hormuz — oil prices spike due to supply disruption fears. Higher oil prices increase costs for businesses and consumers, which can drag down the broader market, especially transportation and manufacturing sectors.

Q5. What is the safest investment during war?

A. U.S. Treasury bonds, gold, and the Swiss franc are traditionally considered the safest assets during wartime. Gold has historically risen during major conflicts as investors seek safe havens. However, a well-diversified portfolio remains the most reliable long-term strategy regardless of geopolitical conditions.

📝 What History Keeps Teaching Us About War and Markets

We covered a lot of ground here. From the panicked first 48 hours to 80 years of S&P 500 data, from the Middle East oil factor to the sectors that thrive during conflict.

The throughline is surprisingly simple: wars are devastating for people, but markets are remarkably resilient. They drop, they panic, and then they recover. Every single time since 1941.

That doesn't mean you should ignore geopolitical risk. It means you should prepare for it before it happens — through diversification, cash reserves, and the discipline to not sell when every headline is screaming at you to run.

The current Middle East tensions — Hezbollah, Iran, oil supply fears — are real and serious. But if 80 years of data about war and the stock market have taught us anything, it's this: the biggest financial casualty of conflict isn't the war itself. It's the investor who panicked.

Did this change how you think about your portfolio? Have you held through a geopolitical crisis before — or sold and regretted it? I'd love to hear your experience in the comments. And if this was useful, share it with someone who's stressing about the headlines right now.

— Thirsty Hippo 🦛

COMING UP NEXT

🔜 Gold vs. Bitcoin: Which Is the Better Safe Haven in 2025?

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