Navigating Stock Markets During Conflicts

At CSS Investments, we know geopolitical conflicts can unsettle investors. Yet, history shows that US & UK stock markets often weather these storms with resilience. Here’s what you need to know about market performance during conflicts and how to position your portfolio.

How Markets Respond to Conflicts

Initial Turbulence:
- US Markets: The US500 typically drops 5–15% at the onset of conflicts. For example, it fell 8% after Russia’s 2022 invasion of Ukraine but bounced back within months.
- UK Markets: The UK100, with its global reach, often sees similar declines, dropping 7% in the week following the Ukraine invasion, slightly outpacing the US500’s dip.

Rapid Recoveries:
- US: After the Gulf War (1991), the Dow soared 17% in just four weeks following a 6.3% decline.
- UK: The FTSE 100 dropped ~6% during the Gulf War but gained 15% within months. Post-9/11, it fell 8.27% but recovered by mid-2002.

Long-Term Resilience:
- US: During wartime (1926–2017), the US500 averaged 11.4% annual returns, beating its 10% long-term average.
- UK: Since 1984, the UK100 has delivered ~7% annualised returns (with dividends), thriving through conflicts like the Iraq War.
Lower Volatility: Both markets often show reduced volatility during conflicts, thanks to stabilising government spending and policies.

What Drives Market Movements?

Economic Context:
- Strong economies cushion conflict impacts; recessions worsen declines. Post-9/11, the US500 and UK100 fell 17% and 8.3%, respectively.
- The UK100’s heavy exposure to energy and mining (e.g., BP, Shell) ties it closely to global commodity prices.
Conflict Nature:
- Short wars (e.g., Gulf War) have milder effects than prolonged ones (e.g., Afghanistan). Domestic shocks like 9/11 can hit harder.
- UK equities, with circa 70% of UK100 revenues from overseas, are sensitive to international disruptions, especially in oil-rich regions.
Sector Winners and Losers:
- Winners: US/UK defence stocks and UK energy/mining firms (e.g., Shell, +10% post-Ukraine) often outperform. BAE Systems (+8%) also shines.
- Losers: Travel and consumer discretionary typically lag.
Safe Havens: Investors often flock to gold, bonds, or lower beta (less volatile) Blue-Chips, with other equities often under pressure. A weaker pound can boost UK100 firms with global earnings, although conversely the opposite can be true when the pound is strong.
Commodity Spikes: Conflicts in oil-rich areas (e.g., Russia-Ukraine) drive energy prices up, lifting UK energy stocks but stoking inflation fears. Oil hit $128/barrel in 2022.

UK Market Spotlight

Global Exposure: The UK100’s international tilt makes it more reactive to global shocks than the domestic-focused UK250, which fell 8% in 2022.
Historical Resilience: During the Falklands War (1982), the UK All-Share dipped ~5% but recovered by year-end. The Iraq War (2003) saw a 4% pre-invasion drop, followed by a 12% rally by mid-2003.
Post-Brexit Sensitivity: Since 2016, UK equities face heightened volatility during geopolitical events due to trade uncertainties.

Actionable Insights for Investors

Stay Calm: Panic selling misses rapid recoveries. History favours those who stay invested.
Seize Opportunities: Consider defence, energy/mining stocks during conflicts. Consider Safe Haven investments such as Gilts or Gold.
Diversify: Balance cyclical sectors (e.g., energy) with defensive ones (e.g., utilities).
Think Long-Term: Economic conditions and conflict specifics outweigh short-term shocks.

Your Next Steps with CSS Investments

Conflicts may spark market jitters, but US and UK equities have historically delivered long-term growth. At CSS Investments, we’re here to help you navigate these challenges with tailored strategies. Want to explore how to position your portfolio? Contact us or complete the following form to arrange a conversation.