introduction
Before 2020, the specter of a worldwide pandemic that would shut down the worldwide economy was not the most important concern for many investors. Pandemics were nothing latest, in fact, but no outbreak in recent history had hinted at anything near the dimensions of COVID-19. For example, there was an outbreak of SARS in 2002 and Ebola in 2014, but each were contained relatively quickly, and the associated impact on economic disruption and human life was little foreshadowing of what COVID-19 would bring.
Before 2022, even fewer investors saw a 3rd world war as a serious possibility. And while such an end result remains to be impossible, the Russian invasion of Ukraine has increased the likelihood. A limited nuclear exchange, let alone a worldwide nuclear war, would have enormous consequences for all of humanity, not to say the securities markets. Nevertheless, it’s price considering what an easy escalation of the present conflict could entail.
Intuitively, war means economic damage and falling stock markets. But that also applies to a worldwide pandemic. Still, the S&P 500 was significantly higher a 12 months after COVID-19 spread worldwide.
Which begs the query: How do stocks – particularly sectors and aspects – perform in times of war?
Stock performance in major wars
To answer this query, we analyzed the US stock market, which has the very best data set for individual securities and indices. Specifically, we evaluated the performance of U.S. stocks during three of the country’s most vital wars: the U.S. Civil War of 1861 to 1865; First World War, from 1917 to 1918; and World War II, from 1941 to 1945.
These three wars had a major impact on the U.S. population and economy. Countless 1000’s died. Infrastructure was each built and demolished. Major cities were destroyed. Some parts of the economy collapsed while others boomed. Yet despite all of the war-related misery and destruction, the U.S. stock market expanded during each the U.S. Civil War and World War II. It was not until the First World War that there was a net decline.
US stock market performance in major wars
Returns are based on closing prices without taking dividends into consideration.
Factor performance in wartime
Unfortunately, stock evaluation suffers from a certain timeliness bias: the further we return in time, the more serious the standard of the securities data. Therefore, the rest of our evaluation will deal with World War II data.
According to data from the Kenneth R. French Data Library, the long-short performance of the scale, value and momentum aspects between 1941 and 1945 was positive, although only only for momentum. The value factor generated a CAGR of 16% and the scale factor generated 11%.
In theory, such returns would have created attractive diversification advantages for a standard portfolio because they represent excess returns from long-short portfolios. But in practical terms, these returns were calculated before transaction costs and at a time when shorting stocks was an inefficient process at best. These results should subsequently be treated with caution.
Performance of things (long–short) in World War II
Performance of industry in the course of the war
But what about industry performance? Did anyone particularly stand out in the course of the Second World War? By analyzing the 49 industries from the Kenneth R. French Data Library, we focused on the highest and bottom ten industries.
We expected the highest 10 to be dominated by industries that were heavily involved within the war effort – heavy equipment and defense corporations, for instance. But the best-performing sector was actually printing and publishing, followed by alcoholic beverages and private services.
Industry Performance in World War II: The Top 10
Even the worst-performing sectors had some surprises in store. Despite generating positive returns, tobacco corporations remained in last place. This is somewhat paradoxical given the beer and spirits sector’s 723% profit share. Did people drink more and smoke less in the course of the war? It can also be obscure why the steel, chemical and aircraft corporations wouldn’t have fared higher.
We haven’t got a solution except to say that financial markets are filled with surprises and never do what is predicted of them. This is why energetic management is so difficult and creates so little value.
Industrial Performance in World War II: The Top 10
Performance of the asset class in wartime
How did bonds perform in comparison with stocks during World War II? Stocks earned the best nominal returns between 1941 and 1945, but short- and long-term government bonds and company bonds all earned positive returns, although after inflation only corporate bonds earned positive real returns.
Of course, the United States and its allies won the war. The Axis powers financed themselves by selling government bonds to their residents. When they lost the war, these became worthless.
World War II Performance: By Asset Class, 1941 to 1945
More thoughts
While investors made money in stocks in two of the three biggest U.S. wars, this evaluation is more backward-looking than forward-looking.
It is difficult to assume a 3rd world war by which nuclear weapons will not be used. Still, these weapons could destroy much of human civilization, not to say capital markets.
In such a catastrophic scenario, few investment options are particularly attractive. Perhaps productive farmland in destinations as distant as Australia or New Zealand could be a viable option, although even here the goal could be capital preservation slightly than capital increase.
Further insights from Nicolas Rabener and the Finominal Team, enroll for her Research reports.
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Photo credit: ©Getty Images / gece33
