How The Stock Market Performs In Times Of War

Investors have been monitoring developments in Ukraine on a daily basis for several weeks. The Russia-Ukraine turmoil has weighed on the market in recent weeks, sending the SPDR S&P 500 ETF (NYSE:SPY) down 10% year to date.

Investors can look back at previous periods of U.S. wars for a potential gauge of what to expect if the U.S. gets involved in the Ukraine conflict in a significant way.

War On Terror: The most recent example of an unexpected U.S. military conflict came during and after the terrorist attacks on Sept. 11, 2001. In the two years following the attack, the U.S. launched large-scale military operations in Iraq and Afghanistan, and the stock market struggled.

From Sept. 10, 2001 to Sept 10, 2003, the S&P 500 dropped 7.4% overall. Tech sector stocks were hit particularly hard. The Technology Select Sector SPDR Fund (NYSE:XLK) dropped 12.9% during that two-year stretch, but some tech stocks got hit particularly hard. For example, shares of chipmaker NVIDIA Corporation (NASDAQ:NVDA) dropped 66% in the two years following the Sept. 11 attacks.

Not surprisingly, a handful of defense and aerospace stocks performed extremely well during the early years of the Iraq and Afghanistan wars. During a weak period for the market overall, shares of Lockheed Martin Corporation (NYSE:LMT) jumped 33.7% in the two years following the Sept. 11 attacks.

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Previous U.S. Conflicts: The good news for investors is that it's certainly no guarantee that war means stock prices will fall.

• During World War II from Sept. 1, 1939 to Aug. 31, 1945, the Dow Jones Industrial Average gained 50%, or roughly a 7% annual return.
• During the U.S. involvement in the Vietnam War from March 1965 to March 1973, the S&P 500 gained a modest 29.1%.

Of course, there are several unique aspects of the conflict in Ukraine that make this situation different than during past wars. Russia is the world's third-largest oil producer, and the U.S. and other nations around the world would almost certainly leverage economic sanctions against Russia if it were to launch a full-scale invasion.

Those sanctions could threaten the global oil supply, sending energy prices higher. A full-scale Ukrainian conflict could also further disrupt global supply chains that have already been hurt by the pandemic. Supply chain issues are already partly to blame for historically high food price inflation.

Benzinga's Take: One way to play defense against market uncertainty is to rotate out of stocks with troubled balance sheets that may have benefited from U.S. pandemic stimulus. Instead, profitable companies with strong balance sheets, valuable brands and U.S.-centered businesses could hold up relatively well during times of war.