Is war good for the stock market?

I’m currently rereading “Antifragile” by N.N. Taleb, which I find an insightful book. It’s also fun to read, if you don’t mind his rants against economists, Harvard professors, bankers, journalists … (the list of professions to which Taleb is averse is substantial). In this book, Taleb describes how traders lost millions of dollars when the Kuwait War started in January 1991. They were betting that the oil price would rise when the war started. Instead, the oil price collapsed from around $39 a barrel to almost half that value. Why did the oil price not rise at the start of the war? Because people expected this war to start, and the expectation was already incorporated in the oil prices.

This reminds me of a strange phenomenon I observed in my own research: the outbreak of World War II led to a dramatic increase in stock prices on the Brussels Stock Exchange. The graph below shows stock returns in 1940 (weighted average of all Belgian stocks). The exchange was closed for a few months in the summer when Germany invaded Belgium, but when it reopened stock prices went up by 30% in September, 18% in October and 37% in December! How could WW2 make stocks so much more valuable? As the Kuwait war, this was an expected war. However, the very swift German victory, which apparently was excellent news for Belgian business, was unexpected. So, stock prices didn't go down because the outbreak of war was expected, but they went up because it led to much less fighting and destruction than stock market investors had anticipated (at least in the short run, no one knew what was still coming).

F. Baudhuin, a contemporary Belgian economist, provides another explanation why the stock market boomed after the start of WW2. In a book written shortly after WW2, he argued that Belgian investors had learned from the first World War that war leads to high inflation. Inflation destroys the return on fixed investments such as bonds and savings accounts, while stocks provide a good hedge against inflation. Based on their experiences during WW1, investors at the beginning of WW2 massively invested their money in stocks to protect themselves against inflation, according to Baudhuin. Hence the dramatic increase in stock prices after the war broke out.