Article by Li Jia
Source: Wall Street Journal
When the guns roar, gold flows in abundance. Even as markets debate whether the Middle East conflict could hamper the global economy, the S&P 500 and Nasdaq indices have both reached new all-time highs. What does war truly mean for U.S. stocks?
The Tongtong Securities report provides a straightforward answer: war and the long-term bull market in U.S. stocks are not opposing forces, but rather closely intertwined. Historical performance of the Dow Jones Index supports this—rising 28% during the Spanish-American War, 26% during the Korean War, and exceeding 80% over the 19-year span of the Vietnam War. The Afghanistan War, which spanned the period before and after the 2008 financial crisis, saw the index nearly double.
Since becoming the world’s largest economy at the end of the 19th century, the United States has generally gained substantial benefits from every war it has fought, except for the Vietnam War—from seizing Spanish colonies in the Spanish-American War, to profiting immensely during both World Wars, and then through the Gulf War and subsequent small-scale conflicts over oil resources, the U.S. transitioned from being a “participant in war” to a “initiator of war.”
The market's response path to U.S. stocks under fire is also clear: before and during World War II, wars primarily affected markets through emotional shocks; since the Korean War, this direct effect has gradually weakened, with wars increasingly transmitting to stock markets through economic channels such as inflation, oil prices, and fiscal deficits.
The Vietnam War was the only war the United States ever "lost," and it profoundly reshaped its approach to warfare. Since then, nearly all conflicts initiated by the U.S. have shared three characteristics: short duration, limited scope, and a focus on oil—and all have ultimately achieved their objectives.
From taking advantage of chaos to provoking conflict, U.S. war strategy has undergone three turning points.
The Spanish-American War of 1898 was the first major war initiated by the United States. At the time, domestic monopolistic conglomerates urgently needed new markets, investment opportunities, and sources of raw materials, making Spain’s remaining colonial empire the ideal target. After the war, the United States gained control of Cuba and acquired the Philippine Islands, Guam, and Puerto Rico. The Dow Jones Industrial Average rose 28% during the three-month conflict, moving in tandem with victories on the battlefield.
When World War I broke out, the United States initially remained neutral. During the market closure in July 1914, investors recognized that the U.S. would be the greatest beneficiary of the European conflict—its homeland, far from the battlefields, could continue producing and exporting arms to Europe. By 1917, American banks, including J.P. Morgan, had provided $10 billion in loans to the British and French governments to purchase weapons. Although stock indices fell nearly 10% after the U.S. officially entered the war in April 1917, the industrial index had risen approximately 107% from its low point in 1914 to March 1917.
World War II was the pivotal conflict that established the United States as a global superpower. At the outset of the war in September 1939, U.S. stocks declined due to the excess profits tax, which suppressed corporate earnings expectations—the Congress imposed a top tax rate of up to 95% on corporate profits exceeding $5,000, severely pressuring the dividend discount model’s numerator. It wasn’t until the Battles of the Coral Sea and Midway in May 1942 turned the tide of the war that investors keenly perceived the shifting momentum, prompting U.S. stocks to bottom out and rebound in advance. During the latter half of the war, the industrial index rose 82%, the transportation index surged 127%, and the utilities index climbed 203%.
The Korean War was the first war in which the United States did not achieve victory. Although demand for military equipment helped stimulate the sluggish post-World War II economy, U.S. forces failed to accomplish their stated objectives. Nevertheless, the Dow Jones Industrial Average rose 26% over the entire period, while the Transportation Average surged 86%.
The Vietnam War became a turning point, as it was the only war the United States lost without gaining any benefit.
U.S. defense spending surged from $49.6 billion in 1961 to $81.9 billion in 1968 (accounting for 43.3% of the federal budget), the fiscal deficit rose from $3.7 billion to $25 billion, and inflation increased from 1.5% to 4.7%. The U.S. share of global GDP fell from 34% to under 30%. Postwar U.S. military strategy underwent a complete shift: large-scale ground wars were abandoned in favor of shorter, lower-casualty, airpower-dominated "proxy" conflicts.
Subsequent conflicts—including the Gulf War, the Kosovo War, the Afghanistan War, and the Iraq War—were all initiated by the United States under the pretext of local conflicts or black swan events, primarily taking place in the Middle East and the Balkans, with core objectives centered on controlling oil resources and meeting arms demand.
The way war affects the stock market has changed: from emotion-driven to economics-driven.
Before and during World War II, wartime events often directly impacted investor sentiment. Victories in the Battle of Manila Bay and the Battle of Santiago Bay during the Spanish-American War each spurred index gains of approximately 10% within ten days; meanwhile, news of the United States entering both World Wars typically triggered panic-driven sell-offs.
However, starting with the Korean War, this direct impact gradually diminished. From November 1950 to February 1951, as UN forces led by the U.S. and South Korea suffered continuous setbacks, the U.S. stock market continued to rise—because the economy, which had stagnated after World War II, was reactivated during the Korean War: U.S. real GDP grew by approximately 8.7% in 1950 and remained above 8% in 1951. The fiscal expansion driven by the war instead became a catalyst for economic recovery.
This shift became even more evident during the Vietnam War. The Battle of Ia Drang in November 1965—the first major engagement of U.S. forces in the war—did not significantly impact the stock market; neither did the Tet Offensive launched by North Vietnam in early 1968 prevent U.S. stocks from reaching new highs. What truly drove the market were instead the Federal Reserve’s tightening of credit conditions in 1966 to offset Vietnam War expenditures, and the two recessions of 1969–1970 and 1973–1975. War sentiment had given way to macroeconomic policy and corporate earnings.
The Gulf War provided the clearest example of "economic transmission." After Iraq invaded Kuwait in August 1990, oil prices surged sharply, leading markets to anticipate a U.S. economic recession and causing the S&P 500 to reach its low valuation. In January 1991, following the multinational coalition’s bombing of Baghdad, oil prices promptly fell back to pre-war levels, and the stock market rebounded in tandem. During the conflict, the Dow Jones Industrial Average and oil prices moved almost perfectly in opposite directions—markets were trading the trade-off between inflation and growth.
The wars in Afghanistan in 2001 and Iraq in 2003 further validated this pattern. The most symbolic example was the killing of Bin Laden in May 2011—expected to be the most breakthrough moment of the Afghanistan War—yet the next day, the Dow Jones fell just 0.02% and the S&P 500 dropped 0.18%. The market essentially ignored the news.
In summary, the U.S. stock market’s response to war has followed a clear evolutionary path: from emotion-driven reactions to economic transmission. In the early stages, market movements were directly influenced by news of victory or defeat, but since the Korean War, the stock market has increasingly focused on real economic factors such as fiscal expansion, inflation expectations, oil price fluctuations, and monetary policy.
War itself is no longer a reason for price movements; it is how war affects growth and costs that the market truly prices in.
Which industry profits from war? The answer is changing.
During World War II, coal was the lifeline of the war effort; the share of bituminous coal rose from 43.8% before the war to 48.9%, and the industry experienced a cumulative increase of 415%.
The Korean War saw oil take center stage, with crude oil extraction and processing ranking as the top two performing sectors, as returns rose steadily from mid-1950 through the first half of 1952. During the Vietnam War, the collapse of the Bretton Woods system forced the dollar to depreciate, and OPEC was permitted to raise prices to compensate for losses; the oil extraction sector surged during the dollar crisis from late 1970 to early 1973, posting a total gain of 1,378% over the course of the war.
The Kosovo War continued this pattern, with raw materials and energy sectors performing best.
The Gulf War was the only exception—during which the transmission channel shifted to an indirect model of “oil prices → economic expectations,” with non-discretionary consumption and healthcare sectors outperforming in the short term, while energy, raw materials, and industrial sectors, which are capital-intensive, underperformed.
A notable trend is that, as the U.S. economy has expanded, the defense industry has shifted from a growth engine to a foundational pillar of the economy. The marginal contribution of a single conflict to overall economic output continues to decline, and stock market drivers are increasingly superseded by macroeconomic factors such as inflation, interest rates, and fiscal deficits.
