With the recent events between India and Pakistan, you might be wondering how war affects stock markets. Honestly according to me these two things are completely different.
First, let’s understand the basics of why the markets would go down during a war. So war is a very capital intensive event, the money which could go in developing skills, building infrastructure, supporting companies. This money goes to weapons, arms, and ammunition. This way the growth of the country takes a major hit. Essentially it is said that “war takes a country 5 years behind”.
But here we are just looking at the GDP and country development, stock markets can behave very differently. Let’s have a look at the historical effect of war on stock markets. A relatively recent one, The Kargil War (May 1999 – July 1999). Instead of crashing down Nifty went from 1159 to 1321 points. A jump of almost about 14% in a matter of three months. Pretty astonishing right!
Now let’s see the effect of major wars. Example World War 1. The American stock market closed for 4 months after the war started! When it reopened, the Dow Jones was down 30%. Two years later in 1915, it was back up to 80 percent.
What I’m trying to say is that wars don’t necessarily take stock markets to a recessionary phase (at least as per the historical data).
So what to do now?
For a Trader
There is no clear observation that the markets fall during war times. But one thing is certain that the stock markets becomes extremely volatile. And volatility is trader’s worst enemy. This is because most of the strategies (maybe technicals or otherwise) best suit a low volatile market. In times of high volatility, these indicators go for a six. So if you’re a trader going easy on your trades might be better.
For an Investor
We have observed that whatever happens (not just wars but any global/geopolitical issues), markets have always gone up. So this time of high volatility might just give you a great opportunity to buy that share you were interested in at a discounted price.
You don’t get anything free in life. If the stock markets have given a higher return over other asset classes then that’s because it comes with higher risk. Its times like these Mr.Market tests us emotionally. If we keep ourselves stable without panicking, in long term you will be the ultimate winner.
