During his farewell address in 1961, President Eisenhower (the retired Army general who led the allies to the beaches of Normandy on D-Day) warned the American people about the “military-industrial complex” which had been passed down from both President Roosevelt and President Truman. In fact, many believe that it was the industrialization caused by WWII that led to America’s exit from the Great Depression. To Eisenhower, if the country were not to change the structure of the economy that it had inherited from WW2, then it would have to consistently be at war. Below is an excerpt from his speech.

“This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence-economic, political, even spiritual-is felt in every city, every state house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”

The words of President Eisenhower resonated for decades.

The chart below shows US stock market returns during conflicts that the US took part in.  As one can see, these conflicts have coincided with both inflation and positive market returns.

Sources: CFA Institute. The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks

Fast forward to more recent years, the war in Ukraine has been another relevant example of why conflicts may benefit the US economy and markets. In 2022, Congress approved over $113 billion of aid and military assistance to support the Ukrainian government and allied nations. Of the $113 billion approved in 2022, about three-fifths ($67 billion) has been allocated toward defense needs. Source: Committee for a Responsible Federal Budget

This money is not sent to Ukraine, but instead, is directed to American arms manufacturers (Lockheed Martin, RTX Corporation, Northrop Grumman, Boeing, and General Dynamics to name a few) that produce planes, missiles, weapons, and other military equipment that are then sent to Ukraine. In other words, in times of conflict, the federal government offers economic stimulus –aka public spending- to weapons manufacturers, as well as to other contractors and suppliers needed to produce the military equipment. Increased revenue often results in increased hiring and payrolls, which may boost consumer spending.  Could this money be spent in different sectors like education or healthcare? Yes, although the political debate to get non-defense spending passed is often more challenging. To Eisenhower’s point, it is difficult to escape the military-industrial complex.

Another impact of the war in Ukraine is that energy prices have increased in European countries. Since the EU ban on oil imports from Russia (as well as the explosion of the Nord Stream pipeline, which connected Germany to the Russian supply of natural gas) EU energy prices have surged. The US has benefited from this situation in at least two ways. First, the quantity of liquefied natural gas (LNG) it supplies to Europe almost tripled since the war in Ukraine started:  2.4 billion cubic feet per day (Bcf/d) in 2021, 6.5 Bcf/d in 2022, and 7.1 Bcf/d in 2023. Prices also increased, as seen in the chart below.

Reuters, 2022. “U.S. LNG exports both a lifeline and a drain for Europe in 2023”

Secondly, some European companies (ie. ArcelorMittal, OCI, Volkswagen, Pandora, to name a few) are shifting operations to the US as natural gas prices rose by more than 400% (at their peak in 2022). Source: Wall Street Journal, 2022. “High Natural-Gas Prices Push European Manufacturers to Shift to the U.S.

To put this in perspective, French glassmaker Duralex saw natural gas soaring to 40% of its operating cost when it was 4% in 2021. Source: NPR, 2022. “Europe fears its industries will jet to the U.S. as energy costs force plant closures”. Paying that much is simply not sustainable nor profitable for companies, some of which ultimately decide to suspend operations in the EU.

Although negative for the EU economy, the migration of European manufacturers to the US will come with economic opportunities.

War is horrible. The human cost is incalculable and there are many economic effects as well, some positive and some negative. Historically, conflicts have not been that challenging for the US economy due to the fiscal stimulus of defense spending. Additionally, American industry has often benefitted from the disruptions in other parts of the global economy. The future may be different, but we would not necessarily turn bearish on markets due to global conflicts. If you, like many people, are worried about the impacts conflicts and other current events may have on your investment; and would like to talk to a professional, please feel free to schedule a call with us at no cost.

 

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