Markets at war
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Markets at war

Writing in Bloomberg Prophets, author and wealth manager Ben Carlson explains how markets have historically dealt with times of geo-political turbulence. Given US President Donald Trump’s recent decision to launch an air strike on a Syrian air base, in response to a suspected sarin gas attack by the regime of President Bashar al-Assad, this is a timely piece of writing. The CFA Institute says that over two thirds of global investment professionals expect the geopolitical climate to affect investment returns over the next three to five years. What can we learn from the past?

Carlson begins his review in 1914, the year of the First World War. Six months after the war began, the Dow dropped by more than 30% - the damage was so significant that the stock market closed for 6 months – its longest ever hiatus – because liquidity evaporated. However, in the 12 months that followed its reopening, it rose by over 88%, which “remains the highest annual return on record for the Dow Jones Industrial Average” according to Carlson. Overall, despite the initial damage done, the market prospered during the war: over its duration, the Dow was up more than 43%, or “around 8.7% annually”.

During the Second World War, an even more positive story played out: there was no initial drop in value, and despite occasionally negative periods, the market rose during the war. Throughout its duration, the Dow rose around 7% a year for a total of 50%.

The Korea and Vietnam wars saw similarly positive performance: 60% and 43%, respectively, for the entire duration of each engagement. The Cuban Missile Crisis, lasting just two weeks, saw stocks drop by 1.2% - although for the entire year (1962), the Dow would rise by more than 10%.

In 1990, stocks dropped by 13.3% in the 21 days after the Gulf War. From July to October, the S&P plummeted by 19.9%. But Carlson is quick to point out that this period “coincided with recession”, making it hard to isolate the impact the war had on the market.

In more recent years, terrorism has loomed large as a new form of war, enabled by fast global travel and the dissemination of ideas and information through high-speed internet connections. Perhaps the most famous terrorist attack in the west was the destruction of the Twin Towers on September 11, 2001. In the fourteen days following the tragedy, stocks fell sharply. Almost 15% in value was wiped off. However, the economy was “in the middle of a recession” during this point, and the fallout from the technology bubble was still in effect. Even so, within a few months, the market had erased its losses following September 11.

The final even Carlson mentions, the invasion of Iraq in 2003, seemed to have no adverse effect on markets, and, following the invasion in March, stocks rose more than 30% that year.

There is an element of reassurance in the stock market’s historic reaction to war: while it in no way minimizes the impact of human suffering that such engagements cause, the market, it seems, is resilient. Nonetheless, Carlson is quick to highlight the unpredictability of it all. He concludes:

“There’s no road map to follow should things get out of hand anywhere in the coming years. Making financial decisions in the face of geopolitical uncertainty can be a scary proposition, so investors need to realize that there are certain things that are out of their control. Predicting geopolitical events is no easy task. Predicting how markets should respond to those events may be even harder.”


The opinions in this article do not reflect those of Dominion Fund Management Limited, and in the instance of any forward-looking statements, these should not be construed as advice. 

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