War: could it be good for your wealth? During a long, hot summer of ever stronger rhetoric between North Korea and the US, and wider talk about a breakdown in globalisation, the subversive notion that war might actually be good has started to find its way around.
The sabre-rattling has had minimal impact. Volatility remains tiny, and world stocks continue to advance. The dollar has weakened and the rest of the world has gained at the expense of the US, but there is no fear of conflict to be seen on the trading screens, despite what is on the television screens.
And might a war even be good? This week a reader posted a comment on one of my pieces online, averring that the clearest lesson from history is "that wars are a positive for US stocks. If Trump sends in the troops the S&P 500 would be a good wartime haven for investors." He added that most wars have worked out well for the US economically, and that big historic market crashes did not happen at times of war.
Does this bear out? The second world war allowed the US to escape the Great Depression, while Japan and Germany, the losers, enjoyed miraculous economic growth and stratospheric market gains in the aftermath. The idea that wars are helpful (at least economically and financially) is not ridiculous.
There is a problem with small sample size; thankfully the US has not been involved in too many big wars. But looking across the world, Jamie Thompson of Oxford Economics found 372 "conflict episodes" in the past half century with at least 25 battlefield deaths each year. Most were civil wars, but there were 47 wars between countries.
Comparing these conflicts with gross domestic product growth, Oxford Economics drew three conclusions. First, the worse the conflict, the worse the impact on the economy. There were 45 conflicts with more than 1,000 battlefield deaths per year, and 70 per cent of these saw slower economic growth after the conflict.
Second, wars bring a near-term economic loss followed by a strong recovery. Typically, within five years GDP rebounds to grow faster than it did in the run-up to the conflict.
Finally, there is the war's length. In wars between countries, those that lasted less than a year saw GDP growth fall below trend for one year, and then rebound - when wars last more than a year, GDP growth tends to continue to decline for several years afterwards.
So a brief war without too many casualties can be good for you. Longer wars with serious casualties are not so good.
All of this refers to the economy. Markets try to anticipate economic developments. So how do markets deal with these developments? The Dow Jones Industrials behaved quite similarly in the past century's two world wars - it sold off by almost 40 per cent initially, then recovered to end the war slightly higher than it had started.
The picture for the least successful US military adventure, Vietnam, is harder to measure because it is tricky to work out where it began. If we start at the Tonkin Gulf resolution in August 1964 and end with the final US evacuation from Saigon in 1975, we find the S&P 500 gained 6.4 per cent over the period - or in real terms, taking into account the inflationary spiral that war started, it lost 37.5 per cent. Unsuccessful wars have nothing to be said for them.
For a war seen as successful, look at the S&P 500 in the first Gulf war - invading Kuwait helped fuel a brief bear market. The market was higher at the war's end than at its start, and went on to spend the rest of the decade in arguably the greatest bull market in history.
And the broader perspective? UK academics Elroy Dimson, Paul Marsh and Mike Staunton compiled market returns from 1900 to 2017 for a range of countries. Losing a big war could hit returns for generations. Austria lost an empire as a result of the first world war - and its stock market returned an average of 0.8 per cent over the period (compared with the US's 6.4 per cent), taking 97 years just to get back to where it had been before the war.
This is true even though Austria now enjoys one of the highest standards of living anywhere on the planet. German stocks fell 88 per cent during the second world war - but the Marshall Plan helped them gain almost 4,400 per cent in real terms from 1949 to 1959.
So, history confirms what we might have thought anyway. Wars are dangerous gambits. If they are swift, and not too damaging they can boost growth, and create investment opportunities once it is clear who will win. But there are better, safer ways to grow an economy or make money. And nobody should put money to work ahead of a war - opportunities to buy come later.
There are many reasons to hope that conflict over North Korea can be avoided. The stock market comes a long way down the list, but it is one of them.
