Summary

The article discusses historical market trends during wartime and suggests a cautious investment strategy during the current conflict between Russia and Ukraine.

Abstract

The article "When to Invest During a War" examines the impact of historical conflicts on the S&P 500, noting that while markets often initially react negatively to the onset of war, they can recover and even thrive before the conflict's resolution. Using WWII, the Korean War, and the Vietnam War as examples, the author observes that market bottoms occurred early in these conflicts, with the exception of the Vietnam War, which was influenced by other economic factors. The article also touches on the market's response to the 9/11 attacks. With the ongoing situation in Ukraine, the author advises investors to consider historical patterns but also to exercise caution, suggesting that while the "Buy the invasion" strategy has been profitable in the past, the unpredictable nature of the current conflict warrants a measured approach to investing. The author plans to capitalize on market volatility by buying into the S&P 500 during significant dips and adding to existing positions if they fall by more than 7% over two days, while also acknowledging the potential for continued market uncertainty and sideways movement.

Opinions

The author is not a historian or politician and does not claim to predict the outcome of the Russia-Ukraine conflict.
Historical data suggests that markets may bottom out early in a conflict and can recover before the war ends.
The "Buy the invasion" strategy, which involves investing at the start of a war, has often been profitable historically.
The author is not overly confident in the market's short-term performance due to the uncertainty surrounding the Ukraine situation.
Despite the market's volatility, the author sees it as an opportunity to buy into the S&P 500 during significant downturns and to add to positions that experience substantial declines.
The author expects market volatility to continue and potentially lead to a prolonged sideways market movement.

When to Invest During a War

Does history’s “Buy the Invasion” strategy still work?

A lot has happened this past week. As a result, the market continued its volatile stretch.

Markets plummeted Wednesday and into Thursday on the news of Russia invading Ukraine. Surprisingly, Thursday did a complete U-turn. While Thursday morning futures were negative, the market managed to squeeze out a solid gain on Thursday. That momentum carried over to Friday, as the S&P 500 was up over 2%.

Futures are again looking negative heading into Monday. While the latest news is that Ukraine and Russian officials have agreed to meet to talk, this turmoil may continue for a long time.

Most countries are on edge with how this situation will play out, and with that, it's important to look at history to see how markets reacted to war.

Previous Wars

I am not a historian or politician — so I have no insight on what will happen between Russia and Ukraine any more than the next person.

With that said, below is a chart of the S&P 500 since 1928.

WWII

WWII began in September 1939, the United States officially entered the war in December 1941, and the war ended in September 1945.

There was not much movement during the beginning months of the war. But the market was down in 1940 and 1941, bottoming in April 1942. July 1941 to April 1942 was a free fall — with the market falling over 30%. Pearl Harbor, which prompted the United States to enter the fighting, was in the middle of this slide in December 1941.

Korean War

The Korean War was fought between June 1950 and July 1953.

The S&P 500 did react negatively to the start of the war — falling from May to July of 1950. But the slide was only 6%

Vietnam War

The Vietnam War was fought from November 1955 to April 1975, with the United States involved in combat from March 1965 to March 1973.

There was no downward movement in 1955 but a small reaction in 1965 as the market tumbled 5% from April to June.

The Worst is the Beginning

Without having lived through these wars, it is difficult to know how much of an impact the Korean and Vietnam War announcements had on the poor market returns versus other factors.

It is also worth noting that the bottom for the market in WWII was during 1942 — the middle of the war — and for the Korean War, the bottom was in the early months. The market started to improve before the war did. The Vietnam War is a different story, as there were other factors in the economy at the time. So unfortunately, the S&P was lower in March 1973 than March 1965.

One other notable event is the terrorist attacks on September 11, 2001. The S&P fell more than 14% in the first week after the attacks.

One note: I decide to exclude the dates of the Gulf, Iraq, and Afghanistan War when looking at this.

There are several charts provided via Fundstrat that show buying the S&P 500 at the start of a war has usually been profitable. “Buy the invasion” is the takeaway.

Markets did take a tumble in the middle of last week as the invasion began. It looked to be a good time to slowly put some cash to use. But because we do not know how this war will play out, it's best not to go overboard. Keeping some cash on the sidelines can be beneficial.

New Territory for Investors

Most investors of today have never lived through a full-scale war. What will be the full economic implications of this? How will investor psychology be impacted and, in turn, impact stock prices?

Another item to consider is that hindsight is 20/20. We never know when the fighting in Ukraine will end. It could go on for days, weeks, months, or even years. And who knows how many other countries get involved.

Since it is impossible to predict the future, I am going to take advantage of the market volatility as best I can — and hope markets don't turn too sour. Any day the S&P 500 is down more than 2%, I will buy-in. And any two consecutive days a stock I already hold is down more than 7% combined, I will add to that position.

I am not confident in the market in the next few months. But I’m also not too worried. Most stocks, especially tech, are already down big for 2022. The S&P is down 8% YTD. Market’s don't like uncertainty — and that is exactly what the Ukraine situation is giving us.

Until we know more, it is hard to know where the market will go. I expect the volatility to continue; maybe that’ll cause the market to move sideways for an extended time.