I couldn’t go on with another week with talk of climbing or investing without acknowledging the massive elephant in the room: the Russian invasion of Ukraine and the threat of evolving war.
Financial markets are not high on my mind. Without a doubt, I sit on a throne of privilege to be able to even consider this article. But all that being said, I have been asked my thoughts on this matter, so here we go.
Today we take a historical look at past market environments during times of war. Importantly, we have to examine if this time could be different.
First off, Some Acknowledgements:
1. I am so amazingly impressed with the Ukrainian people and their leaders to stand and fight for their country against a Goliath of a military force.
2. The toll of human suffering is far more important than anything that follows in this article. I want to be perfectly clear: the impact on the lives of Ukrainians—and honestly most Russians—greatly outweighs the concerns about stock market performance.
3. War and humanitarian crises are not my wheelhouse on this website. For those that are interested and have maxed out coverage by major media outlets, I enjoyed Dan Carlin’s thoughts from his latest episode of the Common Sense Podcast: Gas Up the Cold War.
Markets Are Resilient to War
The truth is, wars and other global periods of civil or geopolitical unrest don’t generally have lasting impacts on financial markets. Financial markets have routinely swatted away the news of wars like a swarm of hornets, perhaps getting stung here or there for a moment, only to prevail with a can of Raid.
Why?
A nation’s defense spending can be a generous portion of the GDP, and this is especially true in the United States. That said, even though a country may spend generously on the prevention, mitigation, or advancement of war, the companies we invest in (largely) do not. Even during times of war, life largely continues as normal beyond the front lines.
The S&P 500 fell by an average of 5% during [major geopolitical] events. Losses were subsequently recovered in fewer than 50 calendar days, on average.
Historical Market Reactions to War
Below is a figure of market reactions from various geopolitical events since the Pearl Harbor attack of 1941. According to research by LPL Financial of 20 major geopolitical events, the S&P 500 fell by an average of 5% during these events. Losses were subsequently recovered in fewer than 50 calendar days, on average.
During World War II, the war which is most commonly being compared to today’s invasion, the Dow rose a total of 50%, or 7% per year, on average. Source
I’ve annotated below on the S&P 500 composite a series of major wars and geopolitical events of the 20th and 21st centuries. Again, a similar trend (usually) emerges: initial drawdown followed by recovery. And sometimes war even creates a bull market, spurring a flurry of industrial activity and economic expansion to support the war effort. World War II is probably the best example of this phenomenon.
Bottom Line: Stock market performance could be volatile for weeks or even months to come. However, the impacts of war on financial markets are often short-term in duration with minimal total drawdowns.
Anticipation of War and Other Geopolitical Events as a Market Driver
A primary driver of market volatility is anticipation and uncertainty. In the recent past, we can all recall the palpable precariousness in late February of 2020. At the time, there were few cases of Covid in the US. Lockdowns had yet to occur, and global supply chains were largely fully intact. The US stock market tanked anyway, falling 30% over the next month.
Why?
The public feared an impending event. Today, Covid has killed over 900,000 people in this country and your 401(k) is looking solid! As crass as that sounds, the emotions were baked in early. Companies returned to doing what they could to provide products, services, and value to shareholders.
Related Post: Shocking Headlines of the 2008 Financial Crisis (And Why They Are So Important Now)
War is, unfortunately, largely the same. In recent weeks, the buildup of Russian troops on the Ukrainian border generated abundant apprehension. Didn’t you feel it? I sure did. We envisioned a major army looming in the mist amongst denuded winter trees, polishing their rifles and waiting for orders. The imagery is terrifying; the uncertainty is real. And markets reacted accordingly. The presence of the Russian army had little impact on global business, yet investors started to fear the idea of war brought on by the land invasion of a major military power.
Headlines along the lines of Potential Land Invasion Not Seen Since World War II, started to become common in recent weeks. And do you know what impact those statements have? Those kinds of statements are at least mildly terrifying! They scare me too! I’ve read my history, and I do not wish for another world war.
Why This War Could Be Different
Globalization of economies and link to Russia
Russia is the eleventh largest economy in the world. While I think it’s fair to say that we’ve all taken great satisfaction in the tightening noose of international sanctions, we cannot expect to strangle Russia’s economy without creating downstream effects for Europe and the rest of the world.
Take for instance, the price of oil. Russia is a major oil producer and the source of much of Europe’s oil. Even the US continues to import Russian oil as I type these words.
Since the start of the Russian invasion on February 24—not including the troop build-up phase on the Ukrainian border—oil has skyrocketed from $93 to nearly $116 at the time of writing, a 25% increase.
For reference, oil hasn’t topped $100/barrel since 2014. In the depths of the Covid lockdowns in early 2020, oil even traded briefly for negative values!
Perhaps more tangible, the national average price in gasoline has risen from $3.44 to $4.01 in the last month, a 17% spike, according to AAA. This trend is likely to continue.
Rising fuel charges can impact us all in myriad ways, from rising transportation prices to muted consumer spending. That hummer is a bummer when gas is $4+/gallon, eh?
Other concerns include continued snags to global supply chains and more inflationary pressure, summarized well in this article by the AP.
The Threat of Nuclear War
This is the big scary one. The Russian invasion is unique: this is the first unprovoked incursion by a major nuclear power. And the guy with the button over there seems determined to achieve his goal of occupying Ukraine, regardless of the cost.
It goes without saying that nuclear war would be a previously unrepresented bit of history in the calculus here. Yes, Americans dropped two nuclear bombs in Japan at the end of World War II, but Japan did not have their own retaliatory stock.
Do I believe Putin is interested in nuclear war? No, not really. But if he feels cornered and defeated, ala Hitler in April of 1945, could he decide to take us all down with him?
My guess is that a tit-for-tat nuclear engagement with NATO and Russia would be devastating on all levels for humanity. As such, our 401(k) balance will be of little concern.
Final Thoughts: Investing During Times of War
So, what is our final approach to this ongoing tragedy? From a financial standpoint, nothing. We are not changing our investment strategy or moving in or out of various funds. If there is sufficient movement in the market, we will do some rebalancing to maintain our desired asset allocation. That’s it.
From a humanity standpoint we’ve been devoting our efforts to organizations lending services on the ground in Ukraine. I recommend this article for anyone interested in getting involved. I fear deeply for the Ukrainian people. They have already suffered immeasurably, and all indications are that things will get worse. My thoughts are dedicated to the survival and future of this nation of victims. The performance of the stock market should not weigh heavily on our minds.
I was hoping you would publish something like this. Thank you!
Absolutely, Adam. I hope it was helpful.