Do markets really react to wars? Headlines vs long term trends
You’d think war and conflict would send markets into freefall. But time and again, the data tells a more nuanced story.
In the case of the Russia-Ukraine war or the more recent Israel-Hamas escalation there was a knee-jerk spike in volatility, where a few sectors took hits, while others surged, but no sustained market collapse. Instead, what we’ve seen is a cycle of energy stocks climbing, defence shares rallying, and broader indices often steading within days/weeks.
So, what’s really going on?
In the short term, markets tend to react fast, but not always in ways you’d expect. Some parts of the market take a hit, others do well, depending on things like location, industry, and investor mood. But over time, the impact of conflict usually shows up in other ways, like changes in inflation, interest rates, or central bank decisions. For example, if a war disrupts energy supplies, that can push up inflation, which then puts pressure on central banks to act.
Over time, even ongoing conflicts get “priced in”. Markets are pretty good at absorbing bad news and moving on - unless the situation threatens broader global stability. Think critical energy supplies, global trade routes, or investor confidence in key regions.
The ESG angle
Conflict can often put advisers, and their clients seeking ethical solutions in a tricky spot. Defence stocks, usually left out of ESG frameworks, have found new favour in a world where security is being redefined. The same goes for fossil fuels - not exactly ESG darlings, but suddenly more attractive when energy independence becomes a priority.
So, do markets care about war? No, not really, they care about disruption to flows of energy, goods, money, and trust.
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