Do stocks crash during war? Market guide

Definition and scope

When people ask "do stocks crash during war?" they usually mean one of two things: (1) Do equity indices experience short‑term, large declines (days to weeks) when armed conflicts begin or escalate, or (2) do conflicts trigger sustained bear markets that persist for months or years? This article treats both meanings explicitly.

Scope and boundaries used here:

• Geography: primary focus on US equities and global equity markets, with notes on regional markets where relevant.
• Conflict types: local skirmishes, regional wars, surprise attacks, and major world wars (e.g., WWI/WWII) are treated separately because their economic impacts differ sharply.
• Time windows: we use typical event windows for market reaction — immediate (days), short term (weeks to 3 months), and medium term (1 year), following common practice in the studies reviewed.
• Assets: equities, government bonds, gold, major currencies, commodities (notably oil), and cryptocurrencies (with a Bitget‑centric note for crypto custody/trading).

Historical overview — broad patterns

Broad historical patterns are surprisingly consistent: markets often fall as the probability of conflict rises or at the moment of sudden escalation, but many episodes show partial or full recovery over subsequent months or years. The size and duration of declines vary by the scale and expected economic impact of the conflict.

Examples from major conflicts

World War I & World War II

Large‑scale global wars produced extreme market dislocations in many countries. U.S. markets experienced bouts of volatility but ultimately outperformed many wartime adversaries because of wartime production advantages, reserve currency dynamics, and the absence of direct occupation. Occupied or defeated economies experienced prolonged collapses in equity markets and currency pegs.

Korean, Vietnam, Gulf, Iraq, Afghanistan

For later 20th and early 21st century regional wars, U.S. equities often showed an initial drop around the outbreak or during heightened uncertainty, followed by recoveries within months in many cases. For example, the Gulf War produced significant oil price volatility and short‑lived risk‑off moves, but U.S. markets recovered relatively quickly.

Russia–Ukraine (2022) and recent regional conflicts

As of 2022-03-10, multiple market summaries reported a rapid risk‑off reaction at the onset of the Russia–Ukraine conflict: major indices fell, commodity and defense names moved notably, and safe‑haven assets gained. Many major indices staged partial rebounds within weeks to months, though economic sanctions, energy shocks, and supply‑chain effects persisted regionally.

Empirical evidence and studies

Academic and industry studies converge on a few measurable tendencies:

• Initial market declines: studies and market reports show average short‑term declines on the order of ~5–12% in headline indices within days or weeks around major hostilities, though the range is wide.
• One‑year outcomes: many historical samples show non‑negative average returns at the one‑year horizon, reflecting recoveries driven by fiscal stimulus, clearer policy responses, or market relief when worst‑case scenarios do not materialize.
• High dispersion: outcomes are highly dispersed — some conflicts coincide with long downturns, especially when combined with recessionary shocks, high inflation, or systemic financial stress.

The "war puzzle"

Researchers describe a paradox: equity markets often decline during the buildup to war, but once conflict begins, markets sometimes recover. Explanations include:

• Ambiguity aversion: markets prefer a known negative (active conflict) to the prolonged uncertainty of a possible, escalating threat.
• Repricing and rotation: initial drops reflect heightened risk premia; subsequent gains reflect clearer policy responses and sector rotation toward winners like defense and energy.
• Policy responses: central banks and fiscal authorities often respond to large shocks, supporting liquidity and demand, which helps stabilize markets.

Mechanisms and economic channels

Multiple channels transmit geopolitical conflict into financial markets:

Macroeconomic channels

• Growth: conflicts can reduce GDP through destruction, business disruption, and reduced demand in affected regions.
• Inflation: commodity and supply‑chain shocks (notably oil, industrial metals, and food) raise headline prices.
• Fiscal spending: wars typically prompt increases in government spending (defense outlays, reconstruction), which can be stimulative and affect bond markets and currency values.

Financial channels

• Risk premia: uncertainty raises equity risk premia, compressing valuation multiples.
• Liquidity and credit: stress can tighten credit, increase sovereign or corporate yields, and reduce liquidity in risk assets.
• Safe‑haven flows: investors often rotate into sovereign bonds, gold, and safe currencies, amplifying moves in both directions.

Asset‑class and sector impacts

Not all assets move together during conflicts. Asset allocation and sector exposure matter.

Equities (broad market)

Broad indices commonly show initial weakness; however, dispersion across sectors is large. Historically, the headline market decline may be meaningful for days or weeks, but many markets recover when macro policy responses and clearer conflict outcomes emerge.

Defensive sectors and winners

Historically resilient or outperforming sectors include:

• Defense and aerospace: higher government procurement and re‑rating of defense contractors.
• Energy and commodities: supply disruptions and price spikes can boost producers' revenues.
• Industrial suppliers and select cyclicals tied to defense or reconstruction.
• Cybersecurity: heightened concern about infrastructure and information security can lift demand for security services.

Losers and vulnerable sectors

Commonly vulnerable sectors:

• Travel, tourism, and leisure: demand drops sharply with elevated geopolitical risk.
• Consumer discretionary: goods and services sensitive to confidence and real incomes.
• Financials: regional banks with direct exposure to impacted areas can face stress.
• Companies with concentrated supply chains or revenue exposure in conflict zones.

Bonds, gold, and currencies

Flight‑to‑safety patterns often appear: high‑quality sovereign bonds (e.g., US Treasuries) and gold frequently appreciate as investors reduce risk. Safe currencies such as the USD and CHF may strengthen, while currencies of countries directly involved or highly exposed can weaken. As of 2022-03-15, Bankrate and other market summaries noted that gold and sovereign bonds acted as stabilizers during the early weeks of major 21st‑century conflicts.

Cryptocurrencies

Cryptocurrency behavior is mixed and remains an area of active study. Key observations:

• High volatility: crypto tends to be highly correlated with risk sentiment in many episodes, often falling with equities during initial risk‑off moves.
• No consistent safe‑haven status: unlike gold or sovereign bonds, crypto has not demonstrated consistent protection across conflicts; some episodes show short‑lived gains, others show sharp losses.
• Operational considerations: custody, on‑ and off‑ramps, and exchange availability can affect crypto liquidity during crises. For users seeking custody or trading tools, Bitget Wallet and Bitget's trading infrastructure are options to consider for secure access to digital assets (note: this is a platform mention, not investment advice).

Role of anticipation vs. surprise

Market response depends heavily on whether a conflict is anticipated:

• Anticipated conflicts: markets often price in the risk ahead of hostilities, producing earlier declines. When the event occurs, the immediate move can be muted because some risk is already reflected in prices.
• Surprise shocks: sudden attacks or unanticipated escalations produce sharper immediate volatility and larger short‑term declines.

Studies emphasize that the buildup phase can be as important as the outbreak date. The "war puzzle" partly reflects stronger declines during the uncertainty buildup than during the conflict itself, when outcomes and policy responses become clearer.

Case studies (concise)

World War II

Over the WWII period, U.S. markets experienced volatility at key moments but outperformed many counterpart economies affected by occupation and destruction. Wartime production, rising corporate earnings in certain sectors, and postwar reconstruction contributed to market resilience in the U.S.

Gulf War(s)

The 1990–1991 Gulf War and the 2003 Iraq conflict produced marked oil volatility and near‑term risk‑off moves. In both cases, U.S. equities showed relatively rapid recoveries after the initial shock once military objectives and timelines clarified.

Iraq/Afghanistan (2001–2010s)

These prolonged engagements coincided with varied macro episodes (including recessions and the Global Financial Crisis), making direct attribution difficult. Over multi‑year horizons, U.S. equities were resilient, but pockets of underperformance existed for firms with high exposure to the affected regions.

Russia–Ukraine (2022)

As of 2022-03-10, market reporting documented a sharp initial sell‑off across equities, a spike in energy and commodity prices, and heavy moves in defense stocks. Major global indices staged partial rebounds over subsequent weeks and months even as sanctions and energy disruptions produced persistent regional impacts.

Recent Middle East regional conflicts

Regional conflicts in the Middle East have historically produced localized market stress, energy price sensitivity, and temporary global risk‑off moves. The magnitude of global equity impact depends on the scale of disruptions to energy supplies and global trade routes.

Investment implications and strategies

What should market participants take away from historical patterns? Below are neutral, evidence‑based considerations rather than specific investment advice.

For long‑term investors

• Time horizon matters: long‑term investors historically have often benefited from staying invested through geopolitical shocks because many downturns proved temporary relative to long horizons.
• Diversification: maintaining diversified exposure across sectors, geographies, and asset classes reduces idiosyncratic risk tied to any single conflict zone.
• Rebalancing discipline: systematic rebalancing captures cheaper valuations in risk assets after sell‑offs.

For traders / short‑term investors

• Volatility strategies: short‑term traders can use volatility products or options strategies to hedge or express views, but these require expertise and risk controls.
• Sector rotation: historical winners (defense, energy, certain industrials) may outperform during conflict phases; tactical rotation can be effective for skilled traders.
• Liquidity and execution: ensure access to liquid markets and reliable trading platforms; in crypto, use robust custody like Bitget Wallet and stable on‑ramp/off‑ramp procedures.

Portfolio allocation considerations

Common defensive measures include higher allocations to high‑quality sovereign bonds, a calibrated exposure to gold or commodity inflation hedges, and maintaining cash buffers for liquidity needs. Allocation choices should reflect risk tolerance, time horizon, and objectives.

Limitations, caveats, and counterexamples

Several caveats constrain how confidently one can generalize from history:

• Scale matters: global wars differ vastly from regional skirmishes; outcomes cannot be extrapolated without careful context.
• Concurrent shocks: wars coinciding with financial crises, pandemics, or large inflation shocks can produce much worse outcomes than war alone.
• Structural change: globalization, financial market depth, and central bank toolkit expansion since mid‑20th century change how markets respond today compared with earlier eras.
• Data and selection bias: many studies focus on notable wars, which can bias averages if benign episodes are underreported.

Methodology and data issues

When evaluating historical studies and headlines, note common methodological choices that affect conclusions:

• Index selection: U.S. vs. regional indices produce different pictures; emerging markets often show larger, longer declines if directly affected.
• Event windows: immediate (±3 days), short‑term (±30–90 days), and one‑year windows give different snapshots of impact.
• Survivorship bias: countries or companies that failed during wars drop out of long‑run samples, biasing long‑term averages upward.
• Confounding events: isolating the war effect often requires controlling for contemporaneous macro shocks like policy shifts or commodity supply changes.

Further reading and notable studies

Key reports and pieces used to synthesize this guide include (short notes on what each adds):

• Investopedia — impact and historical summaries (useful primer on investor behavior and data points on short‑term declines). As of 2024-01-31, Investopedia provided aggregated examples and historical anecdotes useful for event windows.
• The Motley Fool — wartime market behavior and sector insights (clear lay explanations and case examples). As of 2023-10-01, The Motley Fool summarized how different conflicts influenced specific sectors.
• Invesco — “Markets in War Time” PDF (rigorous asset‑class analysis and practical implications for multi‑asset investors).
• Mauldin Economics / RiskHedge — historical performance review and thematic commentary on the "war puzzle."
• Nedbank Private Wealth — practitioner note on how markets respond and portfolio lessons during geopolitical shocks.
• Cooke Wealth Management and Bankrate — accessible summaries covering bonds, gold, and currency responses.
• AEI / Glassman (academic perspective) — longer‑term analysis connecting war risk to macro and market returns.
• LiteFinance and InvestmentOffice — historical index performance during major 20th century conflicts.

These sources cover empirical results, practitioner strategy, and academic perspectives; readers who want primary data should consult original studies and market databases for raw returns and event analysis.

See also

• Geopolitical risk and markets
• Safe‑haven assets (gold, sovereign bonds)
• Commodity shocks and oil price dynamics
• Defense industry and sector rotation
• Market volatility and crisis investing

References

Selected references and their value to this article (no external URLs included):

• Investopedia — Impact of War on Stock Markets: Investor Insights and Trends (primer and aggregated examples; referenced for typical short‑term decline ranges).
• The Motley Fool — Wartime and Wall Street: How War Affects the Stock Market (sector‑level effects and historical vignettes).
• Invesco — Markets in War Time (PDF report with multi‑asset analysis and scenario discussion).
• Mauldin Economics / RiskHedge — Here's how stocks historically perform during wars (historical returns and the "war puzzle" framing).
• Nedbank Private Wealth — How war affects markets and what investors can learn from history (practical lessons).
• AEI / Glassman — War and the Stock Market (academic/long‑run view).
• Cooke Wealth Management, Bankrate, LiteFinance, InvestmentOffice — assorted primers and case‑study summaries used for cross‑validation and sector notes.

Practical next steps for readers

If you are an investor or crypto user asking "do stocks crash during war?" and want to act on the answer, consider these neutral, evidence‑based next steps:

• Review your time horizon and liquidity needs; adjust allocations only if your objectives or risk tolerance changed.
• Conduct a sector and geographic exposure check — identify holdings with concentrated exposure to conflict zones or sensitive supply chains.
• For crypto holders, ensure secure custody and reliable access to liquidity. Bitget Wallet offers multi‑chain custody and integration with Bitget trading services for users wanting consolidated access to digital assets (platform mention for tool awareness; not investment advice).
• If you seek historical return data or want to backtest exposures around event windows, consult original data providers or institutional research reports cited above.

Further exploration of asset‑level data, credit exposure, and scenario modeling is recommended for any material portfolio decision.

Final notes — further exploration and resources

Do stocks crash during war? There is no single, universal answer. History suggests markets often experience immediate risk‑off reactions, yet many episodes demonstrate rebounds and resilience driven by policy responses, sector rotation, and the relief that emerges when uncertainties resolve. The best practice is to combine historical perspective with a clear assessment of your own objectives, maintain diversified exposures, and use reliable platforms for execution and custody — for crypto users, consider Bitget Wallet and Bitget trading services for integrated access.

For more actionable education and tools, explore Bitget's learning resources and wallet integrations to manage exposure across traditional and digital assets.

Reporting notes: As of 2024-01-31, summaries and data referenced from Investopedia and Invesco were used to illustrate typical short‑term declines and asset responses. As of 2022-03-10 and 2022-03-15, contemporary reporting on the Russia–Ukraine conflict and market reactions informed the case study section. All source attributions above reference public industry and academic analyses; readers should consult the named publications for original tables, event windows, and precise empirical estimates.

Explore more: learn how sector exposure and diversified custody can help you manage geopolitical risk. For crypto users, consider Bitget Wallet for custody and Bitget for trading access to a broad set of digital assets.