Wars are breaking out. Some scholars say we are on the "brink of World War 3." When Russia invaded Ukraine, the S&P 500 fell -11% in 3 MONTHS. Today, oil prices are up 5% on Middle East tensions. So, what happens to the stock market during times of war? (a thread)

Stocks are crashing today as tensions in the Middle East have escalated. Iran just launched a major missile attack against Israel which also sent oil prices +5% higher. For the first time in months, markets are pricing-in a real probability of a major war.

Here's a breakdown of the S&P 500's return during major geopolitical conflicts. The S&P 500 falls -2% on average when a major conflict begins. The total average drawdown of these major events is -8.2%. However, there are many other factors at play that sway returns.

The most important factor is if the war breaks out during a recession or not. Regardless of economic state, the average 1-month return is negative. However, if the market is not in a recession, the average 12-month return is +9.2% compared to-11.5% if a recession hits.

As seen below, the market actually rallied during World War 2. After an initial drop, the S&P 500 soared as markets viewed the war as a chance for economic expansion in the US. But, this was a transformative war for the US unlike any of the current conflicts.

A more recent example would be the 9/11. This happened during a time that the economy was already in a recession. Interestingly, this came at a time when the Fed has been hiking interest rates as they were doing since 2022. The S&P 500 fell -18% in 12 months after 9/11.

When looking at a large batch of major geopolitical tensions since 1941, here's what it says. As mentioned, 1-day returns are almost always negative. However, the market bottom typically just takes 22 days with a recovery time of 47 days.

Of course, the broader macroeconomic picture has a major impact on what happens to stocks. Not only does a recession impact war-time stock performance, but it also impacts stock performance during rate cut cycles. The Fed just kicked off a rate cut cycle with a 50 bps cut.

Here are the S&P 500's returns of rate cut cycles depending on if a recession hit or not. History says starting with a 25 bps cut results in an average S&P 500 return of +10% in 3 months in +15% in 12 months. This compares to -15% in 12 months when starting with a 50 bps cut.

Weeks ago, we bought the dip in stocks and cashed in +300 points of profit, as shown below. Now, we have an election with wars and the Fed in focus. We continue to update and modify our trades. How are we positioned? Subscribe to access our alerts:

Sum this all up and you have a very dynamic situation which largely depends on recession outlook. Markets that have many different moving parts almost always come with severe volatility. Subscribe at the link below to access our premium analysis:

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