Military Tensions and
Stock Market Volatility:
The Bull Market Dilemma

Investor sentiment, which often drives market prosperity, becomes highly sensitive to these shocks: declining stock values alarm investors, and even the anticipation of conflict can trigger sharp behavioral shifts. As faith in market stability deteriorates, the stock market itself begins to quiver under the weight of uncertainty.

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Even the mere anticipation of war can spark investor panic, prompting widespread sell-offs that destabilise markets.

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In response, investors often shift their capital to safer assets, such as gold and government bonds, to mitigate potential losses. Fear, uncertainty, and disruptions in the business cycle make earnings forecasts unreliable, contributing to sharp declines in stock values. Even the mere anticipation of war can spark investor panic, prompting widespread sell-offs that destabilise markets. During these periods of fear, the supply of stocks rises while demand falls, driving prices downward and amplifying market volatility.

 

Disruptions in supply and demand further erode market confidence, often leading to broad declines across major indices. As buyers hesitate in the face of abundant stock supply, sellers struggle to find willing purchasers, creating a liquidity crunch that can precipitate a market crash. Such collapses negatively affect IPOs, making it harder for companies to raise capital, attract investors, or maintain collateral values. During periods of military tension, future market outcomes remain highly uncertain; even when stock prices are low, potential buyers often hesitate to enter the market.

 

Understanding the history of stock markets is essential for predicting trends and guiding everyday investment decisions. Historical patterns allow investors to recognize recurring market behaviors and better interpret business cycles, particularly in response to sudden shocks. During periods of crisis, market crashes have not only affected the countries directly involved but have often triggered ripple effects across global markets. Investor sentiment during such times is closely reflected in heightened volatility, with measures like the VIX rising sharply in response to military tensions, signaling widespread fear and anticipated risk.

 

Major global conflicts, including World War I, World War II, the Gulf War, and the ongoing Russia–Ukraine war, have served as pivotal moments in stock market history, triggering volatility and reshaping investor behavior. The Cold War era also left significant imprints on market dynamics. The Cuban Missile Crisis (CMC), occurring in the early years of the Vietnam War, represents a peak of Cold War tension. During this crisis, the Dow Jones Industrial Average (DJIA) fell 5.31% within a single week as the United States and the Soviet Union teetered on the brink of nuclear war (iSectors LLC, 2024).

 

These conflicts have left a profound impact on the investors, demonstrating the reshaping of market dynamics throughout history. During World War 1 in 1914, the Dow Jones Industrial During World War I, the Dow Jones Industrial Average (DJIA) fell by more than 30% within six months of the war’s outbreak, bringing many businesses to a halt as liquidity dried up and capital for investment became scarce (Carlson & B, 2020). Similarly, during World War II, the S&P 500 declined by roughly 30% in its first year (Bhaisora, 2023). Despite the greater scale of destruction and social upheaval in World War II, market declines did not surpass those seen during World War I. Having witnessed the earlier crash, businesses were better prepared, and investors strategically shifted toward defense-related stocks, mitigating the risk of a major market collapse.

 

Whereas World War I struck as a sudden shock, investors during World War II were able to anticipate rising tensions and adjust their portfolios strategically. Stocks related to defense goods experienced significant gains, offsetting losses in other sectors and helping to stabilize the market. This approach also allowed the market to remain open, avoiding a shutdown. World War II thus marked a pivotal moment in stock market history, as investor behavior shifted toward greater adaptability. Those who could anticipate the threats of war became highly cautious and vigilant, carefully managing their investments to navigate the uncertainty.

 

The lessons from earlier wars have continued to shape investor behavior in more recent conflicts. During the Gulf War in 1990, a sudden spike in oil prices sparked panic among investors, prompting premature sell-offs as the threat of conflict loomed. The stock market responded even before the war officially began, with capital investments slowing and the S&P 500 declining by 13.5% over three months following Iraq’s invasion of Kuwait (Standard & Poor’s, 2001). Such events reinforced the importance of historical awareness, encouraging investors to anticipate potential market disruptions and prepare for future shocks.

 

The Gulf War also affected stock markets in countries not directly involved in the conflict, as the spike in oil prices generated volatility across international markets. Over time, however, stock prices recovered alongside a strengthening global economy. As nations became increasingly interconnected through trade and foreign investment, the anticipation or occurrence of a market shock in one country could ripple across others. Rising uncertainty influences a wide range of investments, often causing declines in non-essential goods, or ‘Giffen’ commodities, as consumers deprioritize purchases. Reduced demand for these products can further disrupt business activity, amplifying the economic impact of the conflict.

 

Investors’ shifts toward safer assets play a significant role in shaping an economy’s production cycle. While stock markets may recover relatively quickly once military tensions subside, these events often leave lasting effects on investor behavior. Factors such as government war spending, the rising prominence of defense sectors, and prevailing market sentiment all contribute to these enduring impacts. Nevertheless, investor predictions and responses are not always accurate, and the inherently unpredictable nature of war continues to create recurring dilemmas within the stock market.

 

The Russia–Ukraine war had a significant negative impact on global stock markets. Moscow’s MOEX index fell by nearly 9% in the week following the invasion, with substantial losses observed across multiple indices (Financial Times, 2022). In 2022, as the global economy was still recovering, the conflict affected the GDP of several countries, disrupting their stock markets and triggering widespread volatility. This prolonged uncertainty left a lasting impact on stakeholders, increasing hesitation to invest in consumer goods sectors (ScienceDirect, 2023).

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These global conflicts have encouraged the development of stronger predictive skills, allowing markets to adapt and persist through periods of uncertainty and negative shocks without grinding to a halt.

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Despite the challenges posed by wars, stock markets have often demonstrated remarkable resilience, as investors make careful decisions regarding buying and selling. These global conflicts have encouraged the development of stronger predictive skills, allowing markets to adapt and persist through periods of uncertainty and negative shocks without grinding to a halt. Given the stock market’s central role in driving economic prosperity, unforeseen military threats and the diplomatic solutions that address them can have significant repercussions for the global economy.

 

Understanding how military tensions influence investor behavior is crucial for navigating markets during periods of heightened volatility. Geopolitical risk indices, such as those developed by Caldara and Iacoviello, alongside the VIX, have become essential tools for monitoring market fear during conflicts. At times, however, AI-driven algorithmic trading can amplify this fear, accelerating panic sell-offs and intensifying investor reactions. In such scenarios, diplomatic interventions such as peace talks, treaties, or ceasefires can help stabilise markets and restore investor confidence.

 

The fragility and sensitivity of financial markets underscore the importance of closely monitoring fluctuations and the factors driving them during periods of crisis. Today’s investors operate in an evolving market, informed by historical experience and heightened vigilance, which helps mitigate some of the disruptions caused by military tensions. Yet the inherently unpredictable nature of such conflicts, combined with increasing global interconnectivity, continues to amplify risk. These dynamics highlight the critical need for maintaining market stability and implementing forward-looking policies to support sustained economic growth.