Cannons, Tariffs, and a World War Trigger Stock Market Crash
“Buy on the sound of cannons, sell on the sound of trumpets.”
The famous motto going back to 1810 is attributed to Nathan Rothschild, of the famed Rothschild banking family. The implication is that wars don’t cause a stock market crash. Rather, they favor investment.
The quote’s context was a period of great turmoil and wars in Europe. Napoléon Bonaparte was intent on exporting the disruption of the traditional ruling classes resulting from the French Revolution. There are credible rumors that a major war—World War 3—could break out.
The financial repercussions of a war should not be the first concern (there are human lives at stake, after all). But examining how wars affect stock market performance is timely because the world is very close to a major war; indeed, there are many wars on the horizon. They are both military and commercial wars. If you thought the Dow Jones records of January 2018 meant good times ahead, you would be wrong. And Rothschild’s maxim about wars and market warnings may no longer hold true.
Nathan Rothschild spoke during a period when wars occurred on battlefields. They would also result in a confiscation of assets, as well as changes in leadership. But the weapons were different. There were no drones, guided missiles, or thermonuclear bombs. Mutually assured destruction (MAD) did not exist as a concept.
An inevitable winner would emerge from the conflict. Thus, bankers could make profits by buying bonds and equity at lower prices, when the threat of war was building. After all, the smart money says to acquire valuable assets when others panic and give them away.
Still, as discussed below, the kind of war that may be approaching risks making all assets valueless. Certain stocks, especially the large-cap stocks, move higher during wars. Yet, typically, they do so when outcomes appear to be favorable, when victory seems imminent. That’s when you get the so-called “war rally.”
The next war leaves no room for winners. We’re all losers in a nuclear conflict. As Albert Einstein said of a prospective World War 3, he did not know how it would be fought. But he said World War 4 would be fought “with sticks and stones.”
A Stock Market Crash Is Going to Be the Least of Investors’ Worries
President Donald Trump has faced obstacles to his leadership ever since he announced his candidature for office. His election and inauguration have done nothing to ease the tensions. In fact, the pressure has been relentless. Special Prosecutor Robert Mueller has continued to press, digging into the alleged collusion with Russia (Russiagate). But he’s gone beyond.