- Wars impact stock markets differently based on countries' proximity to conflict zones
- European markets suffered destruction and closures during both World Wars due to fighting
- US and distant economies gained from wartime demand without physical destruction to markets
Discussions about wars and stock markets often fall into two views: wars harm markets through destruction and panic, or wars support markets through higher defence spending and government support. One factor often overlooked is geography. The history of both world wars shows that a country's distance from conflict shaped its market performance.
Impact of World War I on Europe
World War I hit European stock markets hard. When the war began in 1914, panic spread, exchanges closed across the continent, and economies faced inflation and capital controls.
Countries involved in the fighting, including Britain, France, Germany, Italy and Belgium, struggled. In Britain, share prices fell not because companies failed, but because the government diverted savings into war bonds and limited new share issues.
France and Belgium suffered greater damage. Fighting took place on their soil, factories and industrial bases were destroyed, and stock markets lost their economic role.
Germany saw the most severe outcome. Share prices rose after the war, but hyperinflation between 1918 and 1922 erased most real value. Investors could hold large nominal sums without buying basic goods.
Neutral European countries such as Sweden, Switzerland and Norway initially performed better by supplying the war and avoiding destruction. That benefit faded after 1918 as trade disruption and financial instability took hold.
Impact of World War II on Europe
In World War II, occupation shaped outcomes more than participation in the war.
In occupied France, share prices increased, but inflation and financial controls reduced real wealth. The German authorities raised taxes, forced purchases of war bonds and expanded the money supply. Capital controls, price caps and surveillance limited investors' choices.
Axis forces invaded the Netherlands and Belgium. Both countries saw exchanges close for years, leaving investors without liquidity.
Germany's market rose early in the war but began to fall from 1941 as the conflict continued and confidence weakened.
Britain again fell between the two extremes. It faced heavy bombing but avoided occupation. The London Stock Exchange remained open for most of the period, reached a low in 1940 when invasion appeared possible, and recovered as Allied prospects improved.
Neutral European countries occupied a middle position. Their markets remained open and worked better than those in occupied states, though controls limited returns. Neutrality preserved stability but not high gains.
The Other Side of the Map: Distance Plus Demand
A different picture appeared outside Europe.
While Europe faced destruction, the United States emerged from both world wars with its industrial base intact. American factories supplied the Allies, employment rose and corporate revenue increased. During World War I, the New York Stock Exchange closed briefly to prevent panic selling by foreign investors. Support from the US Treasury and banks stabilised the system, and the dollar gained a central global role.
World War II reinforced this position. The United States became a major supplier through government contracts that steadied earnings. American markets benefited from wartime demand without physical damage.
Other non-European economies, including Canada, Australia, South Africa, Japan and India, showed a similar pattern. Distance from the fighting allowed them to supply goods to Europe. Markets stayed open, currencies remained in place and long-term continuity held.
The contrast is clear. Distance turned war into a demand shock rather than a destruction shock. Europe lost capital and stability, while distant economies gained growth and market strength because the fighting took place elsewhere.
The Uncomfortable Lesson
The long-term performance of US equities reflects geography as well as economics. The Atlantic Ocean shielded the country from physical damage while allowing it to supply two wars fought far away.
In their paper Long-Term Global Market Correlations, the authors point to a dilemma for investors during wars. They note that wars are periods when diversification matters most, yet cross-border investing faces the most limits at those times.
Geography influences market behaviour during wars. In a world marked by conflict, the history of wartime finance explains how stock markets respond.
Although modern conflicts rely more on cyber operations, proxies, sanctions and financial pressure than direct combat, countries, borders, factories, supply chains and political power remain tied to physical space. Geography therefore continues to matter, and the risks of war remain.
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