It is common for economists to offer a forecast for the stock market yet add a caveat to the effect that “If a war shock or terrorist attack occurs, then I would have to modify my outlook.” As such, it would seem logical to assume that…they must have access to a study showing that such events affect the stock market, right?
By Vadim Pokhlebkin/Robert Prechter (elliottwave.com) originally entitled* Myth #6: “Wars are bullish/bearish for stocks.”
The answer to the opening question is NO, for the same reason that they do not check relationships between interest rates, oil prices or the trade balance and the stock market. The causality just seems too sensible to doubt. Observe in the form of this claim that you have a choice for the outcome of the event. Economists have in fact argued both sides of this one.
Some have held that war stimulates the economy, because the government spends money furiously and induces companies to gear up for production of war materials. Makes sense.
Others have argued that war hurts the economy because it diverts resources from productive enterprise, not to mention that is usually ends up destroying cities, factories and capital goods. Hmm; that makes sense, too.
I will not take sides here. We can negate both cases just by looking at a few charts.
The chart below shows a time of war when stock values rose, then fell.
This chart shows a time of war when stock values fell, then rose.
This chart shows a time when stock values rose throughout.
This chart shows a time when stock values fell throughout.
Who wins the war seems to mean little, either. A group of Allies won World War I as stock values reached 14-year lows; and nearly the same group of Allies won World War II as stock values neared 14-year highs.
Given such conflicting relationships, why and how, exactly, does an economist expect war to affect his economic forecasts?
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.comand www.FinancialArticleSummariesToday.comand the FREEMarket Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
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