The Impact of War on the US Stock Market Through the Years

By Eugene McCombs - 6/23/25

War has always affected many areas of society, and one of those is the financial markets. This article explores how military conflicts have influenced the US stock market over the years. By looking at specific wars and their economic impacts, we can better understand the relationship between warfare and market behavior.

Historical Context of War and the Stock Market

The US stock market has seen many fluctuations since it began in the 18th century. Wars—whether declared or not—have significantly influenced these economic cycles. Conflicts from the Revolutionary War to modern times have shaped market performance, impacted investor confidence, and led to changes in government policies.

When wars occur, they often spark increased spending on military supplies and change consumer behavior. For instance, wartime spending can make sectors like manufacturing boom. Yet these changes can also create uncertainty, leading to both positive and negative outcomes for the stock market. Research shows that during conflicts, the average stock market return can vary significantly, with some periods enjoying a rise of up to 12% while others face declines of 15% or more.

World War I: A Catalyst for Change

During World War I (1914-1918), the US economy shifted from peacetime to wartime. Increased government spending led to rapid industrial growth, with production soaring. For example, the General Motors plant, which focused on making cars, switched to producing airplane engines. This transition resulted in stock prices climbing; in fact, the Dow Jones Industrial Average rose by approximately 64% from 1914 to 1919.

However, once the war ended and demand for military goods dropped, the market faced volatility. By 1920, the stock market plummeted by around 40%, anticipating the Great Depression. The lasting effects of this war also resulted in stricter regulations and the establishment of financial safeguards, which helped shape a more resilient market in the future.

World War II: Economic Expansion and the Post-War Boom

World War II (1939-1945) profoundly impacted the US stock market. The war effort required massive government spending and resource mobilization, contributing to an extraordinary period of economic growth. For instance, unemployment dropped to about 1.2% by 1944, with millions of jobs created in factories.

As companies shifted from consumer goods to wartime production, stock prices surged. By the war's end, the Dow reached an all-time high, reflecting investor optimism. In the post-war era, the economy boomed, with the Gross Domestic Product (GDP) growing by 37% in just a few years. Returning soldiers stimulated sectors like housing, consumer products, and infrastructure development.

However, this surge came with challenges. The transition from wartime to peacetime caused market turbulence, showing vulnerabilities that policymakers needed to address to stabilize the economy.

The Vietnam War: Market Volatility and Public Sentiment

The Vietnam War (1955-1975) marked a shift in public perception regarding military engagement and its economic effects. During this time, the stock market grappled with rising oil prices, inflation, and changing investor sentiment.

Stock prices varied greatly due to factors such as public protests and political divisions. The Dow, for example, fell by about 30% during significant moments in the conflict, reflecting underlying tensions and uncertainty. Public opinion increasingly influenced investing decisions, highlighting the market's sensitivity to geopolitical tensions.

Ultimately, the Vietnam War taught us many lessons about how military conflicts can create economic instability, which would remain relevant for future conflicts.

The Gulf War: A Brief Surge

The Gulf War in the early 1990s created a swift and short-lived surge in the stock market. The rapid military success reassured investors, leading to a spike in stock prices, which surged by approximately 15% in just weeks following the initial military operations.

However, this boost did not last. Speculation from the initial victory eventually led to a correction in the market. The Gulf War illustrated the stock market's tendency to react quickly to military successes, while also reminding investors to approach such uncertainties with caution.

The War on Terror: Long-Lasting Effects

The events of September 11, 2001, led the US into prolonged military campaigns, especially in Afghanistan and Iraq. This "War on Terror" significantly affected the stock market. In the immediate aftermath, stock prices dropped dramatically, with the Dow losing about 7% in just a week due to increased volatility and fear.

Over time, specific market segments—particularly defense and technology stocks—began to benefit from a surge in government spending related to national security. The S&P 500 index saw a steady growth after the initial drop, but the underlying impacts of these conflicts raised questions about military spending and national debt.

The Long View of War's Economic Impact

The relationship between war and the US stock market is intricate and rooted in historical context. From World War I to today's ongoing conflicts, wars have shaped market behavior in many ways. While some conflicts result in immediate stock price surges driven by government spending and industrial growth, others incite significant downturns due to public discontent and economic instability.

Understanding these dynamics gives valuable insights to investors and economists. History shows that the repercussions of war can surface long after the fighting ends, impacting not just the stock market but the broader economy.

In a world filled with geopolitical challenges, recognizing war's effects on the stock market is crucial for navigating economic landscapes. Investors should stay informed about market trends shaped by warfare to anticipate changes and remain strategic in the ever-evolving financial environment.