Historically, wars have been very good for the stock market. Over the course of World War II, the S&P 500 gained 110 percent.  It climbed 84 percent during the Vietnam War and even the brief first Persian Gulf War prompted a 12 percent rise, according to a report from the Consulting Group at Smith Barney.

Current and future conflicts, however, may not follow suit. Unlike World War II, which saw a rapid and drastic economic retooling in support of the war effort, wars as they are fought today impact our lives—and the economy—far less. According to a study on the costs of the Iraq war by William Nordhaus, an economics professor at Yale University, in the years leading up to World War II, defense spending rose by an amount equal to 10 percent of the GDP, and 41 percent during the war. By comparison, defense spending rose by the equivalent of three-tenths of 1 percent of the GDP during the Gulf War. Even with fighting in Iraq continuing far longer than expected, the Congressional Budget Office projects that combined spending for Iraq and homeland security over and above normal levels will amount to just about 1 percent of the GDP in 2005. This means the current war in Iraq will neither directly help nor hurt the domestic economy in the outsized way we saw during World War II or Vietnam.

Financial professionals like Dean Dordevic, a portfolio manager at Ferguson Wellman in Portland, Ore., say that there are those who are investing capital into typical wartime plays such as energy, materials, durable goods and defense companies. However, they are doing so selectively: A profiteer’s war this is not.

Despite its marginal economic impact, the war has taken a psychological toll. “It’s making people hold back and wonder. And they don’t have confidence in the strength of the country,” says Rosabeth Moss Kanter, a professor at Harvard Business School. This hesitancy is worrisome, she says, because psychology drives the economy. “You’ll see the same business plan or earnings report differently depending on how you think things are going, and whether you’re feeling more optimistic or more risk-averse,” she says.

Benjamin Pace, chief investment officer at Deutsche Bank’s Private Wealth Management Group in New York, expects that over the next five years or so, equity market returns will be lower than the historical average of 10 to 12 percent.

Illustration by Viktor Koen.