Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

Investors worried about what will happen to stocks in the wake of increasing tension between the U.S. and North Korea are going to be hard-pressed to find a reliable historical comparison.

The very notion of trying to weigh or predict a stock market reaction is absurd, of course, in the event of a nuclear attack or conventional war that costs hundreds of thousands of lives. Financial matters would be the least of anyone's concerns. Any war, particularly one that drew in Japan or China along with the U.S., would be a devastating blow to the world economy and stock markets. 

But absent an unthinkable catastrophe, the investing calculus gets a bit murky because there seems to be little connection between what investors are willing to pay for stocks and the level of conflict around the world.

The most prominent model brought up for stocks and conflict is the lack of it. In the early 1990s, the breakup of the Soviet Union and the quick resolution of the first Gulf War seemed to suggest that threat of military conflicts for the U.S., or at least prolonged ones, was remote. In the two years after the Gulf War, the market's price-to-earnings ratio soared to 25 from 15. The so-called peace dividend was often cited as a contributor to the 1990s bull market. And stocks dropped after the Sept. 11 terrorist attacks.

Conflicted Correlation
Stock values rose in the 1990s as the world got more peaceful, but in other periods there hasn't been much of a tie between wars and the market
Source: UCDP Battle-Related Deaths Dataset

The opposite seems to be happening now. The Dow Jones industrial average dropped 1.1 percent after President Donald Trump unleashed his tough talk on North Korea and its nuclear program last week. If the early 1990s are a model, given how much stocks seemed to get a boost from peace, then the current market, which has P/E ratio of 19, would appear poised for a big drop.

The correlation of the early 1990s, however, is looking more and more like a coincidence.

Market valuations, for instance, rose during the Korean War and advanced quickly afterward. During the Vietnam War, however, the S&P 500's P/E ratio dived numerous times and plunged afterward. More recently, it has been harder to detect the peace dividend or the war discount. P/E's have risen despite continued fighting in Afghanistan, the war in Syria and the threat from ISIS. In the 1990s, the rise of the stock market most likely had more to do with the emergence of the internet and falling interest rates.

No Syria Slump
The stock market has continued to rise, particularly after Trump won, even though there has been rising conflict in the Middle East
Source: Bloomberg

Why the market dropped last week may have more to do with Trump himself and not the threat of imminent hostilities. In part, what has driven the market since the election is the idea that Trump is not only pro-business but unabashedly pro-stock market. He tweets regularly about the market's new highs and seems to use it as a measure of the success of his presidency. But the tough talk on North Korea, as most would have expected, upset the market. In large part, though, it reflects Trump's undisciplined nature and unpredictability and not necessarily a belief that the U.S. is about to be attacked by North Korea or embark on a large-scale conflict in Asia. 

So the market's retreat last week may just be another leg in the general reversal of the Trump trade that has boosted the market since the election. The "locked and loaded" tweets have, once again, opened the valve on the Trump bubble. More air is likely to come out. Tension with North Korea will continue to be important, of course, but the focus of investors will be on the mindset of the man who can pull the trigger.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Stephen Gandel in New York at

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