Stocks, Bonds, and War

TL;DR

Wars and financial markets have a complex relationship, with historical examples showing devastating effects on individual markets, but global markets have generally remained resilient. Crises and wars tend to reduce global market returns and increase volatility.

Transcript

• A quick note before I start, the unprovoked aggression currently happening in Ukraine is unacceptable and heartbreaking. War in general is horrific and above all else a human tragedy. I'm not minimizing that by talking about the financial, economic impacts. Wars and financial markets have coexisted and often been intertwined for hundreds of years... Read More

Key Insights

• 🫱 Wars have historically had devastating effects on the financial markets of individual countries, with total losses for investors in some cases.
• ↩️ Global markets have generally remained resilient during major conflicts, but market returns tend to decrease and volatility increases during crises and wars.
• ⌛ Investing in globally diversified portfolios and maintaining ownership through turbulent times has been a more successful strategy than trying to time the market or make tactical asset allocation decisions.
• 😀 The worst historical global stock market returns have occurred during peace time, highlighting the importance of diversification and resilience in the face of market volatility.
• 🫱 Bond markets have also experienced significant losses during wars, challenging the perception of bonds as a safe asset.
• 🫱 The long-term performance of global stocks has been positive, despite major wars, demonstrating the benefits of diversification and a globally diversified investment strategy.
• 🫱 Political uncertainty and the prospect of war fall under the realm of uncertainty, making it difficult to predict their financial impacts accurately.

Questions & Answers

Q: How have wars historically affected the financial markets of individual countries?

Wars have had devastating effects on the financial markets of individual countries. In some extreme cases, investors' assets were expropriated, resulting in total losses. Examples include the Russian Revolution and the Chinese Civil War, where investments in stocks and bonds became effectively worthless.

Q: Did all countries experience significant drops in their financial markets during World War I?

No, the impact of World War I on financial markets varied across countries. German stocks, for example, dropped more than 90% in real returns measured in US dollars by 1922. US and UK investors also experienced losses, but not as severe as Germany.

Q: What were the investment outcomes following World War II?

The years following World War II saw some of the most extreme positive returns in stock market history, despite dramatic drops during the war. For example, the German stock market increased at a rate of 61% per year from 1949 to '59, and Japanese stocks appreciated at 28% per year during the same period.

Q: How have international political crises impacted global stock market returns?

A study analyzing 440 international political crises from 1918 to 2002 found that such crises reduced world stock market returns by about 4% per year on average. The first month of a crisis typically had large negative stock market reactions, and returns remained lower than average for the duration of the crisis.

Summary & Key Takeaways

• Historical examples, such as the Russian Revolution and the Chinese Civil War, have shown that wars can result in total losses for investors in the stocks and bonds of affected countries.

• Major wars, like World War I and World War II, had varying impacts on different countries' financial markets. Some markets experienced significant drops, while others fared relatively better.

• Investing in globally diversified portfolios and maintaining ownership through turbulent times has proven to be a more successful strategy, as seen in the positive returns of global stocks despite major wars.