In the world of investing, conventional wisdom might suggest that global wars and conflicts would devastate stock markets. Yet, history tells a different story: rather than sinking, stocks often rally during these periods of geopolitical turmoil. According to Tom Lee of Fundstrat, this trend holds true for most major conflicts in recent memory, making these scenarios unexpected buying opportunities for savvy investors.
During a recent interview, Tom Lee highlighted that “if we look at the last six global wars or tensions, you almost always buy the invasion.” This insight aligns with historical patterns showing that, despite the initial panic and market drops, investors who buy during conflict periods often see positive returns once the dust settles. The only recent exception was the 2022 Russia-Ukraine conflict, but that anomaly was attributed more to the Federal Reserve’s aggressive tightening cycle than the conflict itself.
Historical Precedent: Wars as Catalysts for Market Rebounds
Let’s break down how some of the major conflicts in the past century have affected stock markets and why they turned out to be good buying opportunities:
- World War II (1939-1945): Initially, the Dow Jones Industrial Average dropped sharply after the German invasion of Poland in 1939. However, once the U.S. entered the war in 1941, the markets began a strong upward trajectory, culminating in one of the most significant bull markets of the century. By the end of the war in 1945, the Dow had risen over 50% from its wartime lows.
- Korean War (1950-1953): During the early months of the Korean War, the S&P 500 dropped by about 12% as fear and uncertainty gripped investors. But as the U.S. economy adjusted to increased military spending and production, the markets rebounded sharply. By the war’s end, the S&P 500 had recovered all losses and posted gains.
- Vietnam War (1955-1975): Although long and politically unpopular, the Vietnam War led to growth in sectors such as aerospace and defense. Companies like Lockheed Martin and Boeing saw substantial gains as the conflict progressed. Despite overall market volatility, defense-related stocks emerged as winners.
- Gulf War (1990-1991): The S&P 500 fell sharply in the months leading up to Operation Desert Storm. Yet, once the war began, markets rebounded, climbing nearly 30% in the following months. The swift and decisive nature of the U.S. victory restored investor confidence.
- Iraq War (2003): Similar to the first Gulf War, the initial stages of the Iraq invasion triggered market volatility. However, as the U.S. secured control, energy, defense, and infrastructure stocks posted strong gains. Investors who “bought the invasion” were rewarded handsomely.
Why Do Stocks Rally During Wars?
Wars and geopolitical tensions often generate fear, leading to initial sell-offs. But as the situation stabilizes, several factors contribute to a stock market recovery:
- Increased Government Spending: Wars tend to drive massive government expenditures, especially in defense, technology, and infrastructure. This fiscal stimulus can act as a catalyst for economic growth, boosting companies that supply goods and services to the military.
- Sector-Specific Gains: Defense, aerospace, and energy stocks typically benefit from increased government contracts and rising demand for commodities. Investors often rotate into these sectors during conflicts.
- Investor Repositioning: When uncertainty is high, investors tend to exit riskier assets in the early stages. But once clarity emerges, the re-entry of capital—particularly into sectors poised to benefit—can fuel robust market rallies.
The Tom Lee Perspective: Why the Current Market Could Rally
Tom Lee’s recent comments reinforce the idea that wars are often “buy the invasion” moments. He notes that despite the elevated market multiples and high valuations today, there’s a significant amount of “firepower” in the form of cash on the sidelines. He pointed out that “margin debt hasn’t risen for four months…money market cash has actually been rising at a time when the Fed is cutting.” This suggests that investors are holding back due to uncertainty but are ready to deploy capital when the opportunity feels right.
This liquidity, when combined with potential fiscal stimulus from wartime spending, could act as a major bullish catalyst for stocks. While the current market is hovering near highs, Lee argues that wars often trigger repositioning that can unlock significant value in sectors such as defense, infrastructure, and commodities.
Additional Expert Opinions: The Strategic Approach to Conflict Investing
Tom Lee’s perspective isn’t isolated. Many market analysts agree that while the initial stages of conflict can be perilous, the aftermath is often marked by strong recoveries:
- Jeremy Siegel, Professor of Finance at the Wharton School, notes that “wars tend to cause an initial shock, but markets quickly adjust as governments ramp up spending. The key is to focus on sectors that benefit from increased military outlays, such as technology, defense, and materials.”
- John Stoltzfus, Chief Investment Strategist at Oppenheimer Asset Management, echoes this sentiment, saying: “Investors should look for opportunities in industries tied to government spending, such as construction and defense contractors, as these sectors typically lead the recovery.”
Caution: Exceptions to the Rule
While wars have historically been good buying opportunities, there are exceptions. The Russia-Ukraine conflict in 2022 is one such outlier. According to Tom Lee, the market failed to rally during this conflict because “we were also in the midst of a Fed tightening cycle.” This underscores the importance of considering macroeconomic factors when making investment decisions.
Conclusion: A Strategic Mindset During Conflict
Investing during wartime isn’t for the faint of heart. Volatility, panic, and uncertainty can create nerve-wracking conditions. However, for those willing to endure the storm, history suggests that wars can present rare buying opportunities. The key is to focus on sectors poised to benefit, monitor liquidity and macroeconomic factors, and have the discipline to buy when fear is at its peak.
By understanding the historical context and leveraging expert insights, investors can turn geopolitical crises into opportunities. As Tom Lee puts it, “if history is any guide, you almost always want to buy the invasion.”
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