The Little Book of Stock Market Cycles: How to Take Advantage of Time-Proven Market Patterns

Chapter Two

War and Peace

How War and Peace (and Inflation) Impact the Market

Without a doubt, the single most important enduring influence on the stock market is war. For as long as the United States has been embroiled in a significant and lasting military combat operation, the stock market has failed to make any significant headway. And so it bodes well for the markets that more than a decade of foreign conflict following the September 2001 terrorist attacks is drawing to an end.

But this is not just true for today’s markets. The impact of war and peace and inflation has been the driving force in creating the cycle of booms and busts for the past two centuries and beyond. What makes the market range-bound during wartime and causes it to rise during peacetime? The answer is inflation. The government empties the treasury during a war. It also focuses on foreign or war-related issues rather than domestic concerns and the economy. The result is a sustained rise in inflation. Only after the economy settles down and the country refocuses on domestic issues does the stock market soar to new heights.

Creatures of Habit

Human history is replete with episodes of economic booms and busts and the rise and fall of societies. For millennia, starting well before the Common Era, complex civilizations produced massive structures, innovative technology, and cultural feats of education, literature, math, science, and philosophy only to suffer their own demise. Rome fell, the Dark Ages shrouded ...