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What effect does conflict and war have on the stockmarket? In this article we look at past wars/conflicts and examine what the future might be with the current conflict in the Middle East.

Maybe I should stop taking my two-week Nantucket trip each summer. Last year during our stay we were glued to the news over the London terrorist bombing, and this year it was Hezbollah's kidnapping of two Israeli soldiers, prompting the current fighting in the Middle East.

There's a thought on Wall Street that investors should be

"buying when the cannons sound and selling when the trumpets sound."

When thinking about this view I harkened back to mid-March of 2003, when on the eve of the current Iraq war, Schwab's Investment Strategy Council (which I chair) made our first post-bear market move into bullish territory, moving to an overweight on U.S. equities. We didn't precisely nail the market's bottom, but we were pretty darn close at seven days later.

So, as I sat on vacation mulling world events I wondered whether the escalating violence in the Middle East may give the market an opportunity to bottom. We've been cautious on the markets for a while now, and I'd love to be writing that a significant low was put in place with last week's nearly 400-point rout (for the Dow Jones industrial average), but I think it's still premature to declare the correction a thing of the past. A short-term rally may be in the offing if bearishness reaches another extreme (certainly to be expected given last week's action), but there remain enough headwinds to keep us on the side of cash.

Protracted military conflicts
My friend and ISI strategist Jason Trennert put an interesting table out today highlighting the unsurprising relatively weak market action (average annual change) during periods of protracted military conflict.

Military Conflicts and Market Returns

Source: ISI Group

Note that the table shows the War on Terror as inclusive of this latest turmoil, a view to which I subscribe.