How the Stock Market has Historically Reacted to War and Other Crises

Russia’s position as a nuclear superpower makes the current situation most like the Cuban Missile Crisis of October 1962.

Warren K. Leffler/Library of Congress

When Russian tanks rolled into Ukraine on Feb. 24, beginning the largest land war in Europe since Germany invaded France in May 1940, they also sent shock waves through the markets.

The Russian economy is hemorrhaging. European stocks have fallen into technical-correction territory. And whipsawed U.S. markets—still in the black, for now—face spiking energy prices that may signal recession. What happens next is anyone’s guess, with no end in sight to the invasion and the fate of the entire word seemingly in the hands of one man, Russian President Vladimir Putin.

“The market hates uncertainty,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. But Clissold also delivered some good news: After an initial bout of uncertainty from crisis events such as war and economic shocks, investors tend to quickly regain their footing.

NDR examined the effect on stocks of more than 50 crisis events since the turn of the 20th century—from the Panic of 1907 to the Covid-19 crash of 2020—and found a pattern. After falling an average of 7% in the immediate aftermath of a crisis, the Dow Jones Industrial Average rose 4.2% over the next three weeks. Nine weeks later, it had gained 6%, and after 18 weeks it was up an average of 9.6%, according to NDR.

Not every event followed the pattern precisely, and all were subject to larger economic forces. Yet the study shows a remarkable symmetry in market reaction.

Germany’s invasion of France 82 years ago didn’t come as a surprise—a state of war had existed since Germany’s invasion of Poland the previous year—but it still sent stocks reeling. The Dow dropped 17.1% in the immediate aftermath, and dipped another 0.5% over the next three weeks, according to NDR data. But nine weeks later it had gained 8.4%, and it was still up 7% after 18 weeks.

More recently, Russia’s stealth invasion of Crimea in 2014 caused an initial 2.4% drop in the Dow. It then gained 1.2% after three weeks, 4.4% after nine, and 5.7% after 18, according to NDR.

Does this mean it’s time to pile into stocks? Not necessarily. To take another 21st century event, Russia’s 2008 invasion of Georgia: An initial 2.2% decline in the Dow only got larger with time, as the gauge fell 4% over the next three weeks, 26% after nine, and 34.2% after 18. Of course, that was happening during the depths of the subprime mortgage crisis, which surely weighed more heavily on stocks than a distant foreign war.

What happens next depends largely on three factors, according to Clissold. One, “this is a negative for European economic growth,” he says, citing the many interconnections between the economies of the combatants and the other nations of Europe. That could be a drag on the whole global economy.

Two, according to Clissold, will be the effect on energy markets, with Russia being one of the major oil, gas, and coal suppliers to Europe and elsewhere. Germany, for instance, has moved to suspend the certification of the Nord Stream 2 gas pipeline from Russia.

The third key factor, according to Clissold, “is how the Fed reacts.” Any plans to aggressively raise the federal-funds rate are likely off the table, he says, not to mention suggestions of a half-point hike this month.

Another factor in today’s crisis is the involvement of nuclear superpower as a combatant. Putin has threatened to retaliate against anyone who interferes in his Ukraine putsch. Could that include the use of nuclear weapons?

Perhaps the closest historical comparison to this is the Cuban Missile Crisis of October 1962, when the U.S. and USSR engaged in a stare-down over ballistic-missile deployments in Cuba and Turkey.

The fear of nuclear war was very real at the time, with duck-and-cover drills a regular classroom feature, and the novel Fail-Safe—about the accidental dropping of a U.S. nuclear warhead on Moscow—being serialized in the Saturday Evening Post.

The Dow’s initial reaction to the crisis was a 1.1% gain, which nevertheless represented a slowing down of a raging bull market that followed the recession of 1960-61. Three weeks later, the Dow rose 12.1%, and it would continue soaring—up 24.2% in nine weeks and 30.4% in 18, according to NDR.

The resolution of the Cuban Missile Crisis hardly ended the Cold War. But it at least brought some semblance of certainty to investors, even amid the risk that World War III could break out at any time. It might be the best we can ask for now, as well.