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Wall Street and Wars

Trying to figure out who wins on Wall Street before or after a war has been fought is dicey. While it's true that over the long-haul post-war total returns have been positive, what happens to markets shortly before ---or afterwards--- isn't that cut and dried.

A look back on the performance of the S & P 500 one and two years before, and one and two years after World War 11, Korea, Vietnam and the Gulf War show, what I'll call, the Sometimes Affect: Sometimes markets perform poorly prior to a war and then rally afterwards and sometimes they don't.

"The contemplation of war, the leading up to war and even the start of war hurts the markets, " says Roger Ibbotson, chairman of Ibbotson Associates, a Chicago-based securities research firm. " Then once a war starts going well, generally the markets go up. But, you know there will always be exceptions."

One exception was Vietnam. In the one- and two-year periods prior to that war beginning, the S & P 500's total return was up; two years after the war ended, they were down.

'We never really won that war," says Ibbotson, who is also a professor at the Yale School of Management. "Things (during the Vietnam war) never got better for us. The markets were weak culminating with the recession of 1973 and 1974."

During the Gulf War, however, the market was off in the year prior to the war and up during the year of the conflict. "After we easily won the war the markets had very good returns," said Ibbotson.

Since the numbers show that winning a war is good for the markets, keep in mind what's going on in the economy prior to a war, how long a war lasts and public's sentiments and feelings about a war all impact the market as well.

What follows is a time-specific look at how S & P 500 performed during the last four wars of the 20th century:

  • World War 11. According to Ibbotson, one year before World War 11 began, (12/1940 through 11/1941), the S & P 500 was off 7.76 percent. Looking back two years, (12/1939 through 11/1941), the cumulative total return for the S & P 500 was down 14.61 percent. Then, one year after the war was over, (8/1945 through 7/1946) the S & P 500 was up a solid 27.36 percent; two years afterward (8/1945 through 7/1947) the market's cumulative return was a positive 17.49 percent.

  • Korea. One year before that war began, (7/1949 through 6/1950), the S & P 500's total return was up 34.4 percent; two years before (7/1948 through 6/1950), the S & P 500s cumulative total return was up 21.68 percent. One year after the war ended, (8/1953 though 7/1954) the market was up 31.89 percent; after two years, (8/1953 through 7/1955), its cumulative total return was 94.37.

  • Vietnam. In the year before the Vietnam conflict began,(3/1964 through 2/1965), the S & P 500 was up 15.85 percent. Two years before, (3/1963 through 2/1965), the S & P 500's cumulative total return was 44.74 percent. One year after the war, (2/1973 through 1/1974), the market was down 14.02 percent. Two years afterwards, (2/1973 through 1/1975) its cumulative total return was down 28.25 percent.

  • Gulf War. In the calendar year prior to the Gulf War beginning, (1/1990 through 12/90), the S & P 500's total return was down 3.17 percent. But two years before, (1/1989 through 12/1990), the market was up 27.32 percent. One year after the Gulf War ended, (3/1991 through 2/1992), the S & P 500 was up 15.97 percent. Two years later, (3/1991 through 2/1993), it's cumulative total return was up 28.24 percent.


    Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

    To read more articles, please visit the column archive.

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