Is The Threat Of War A Good Time To Sell Stocks?
As a result of last week’s assassination of an Iranian general by the U.S. military, investors are understandably worried about the impact that a potential war with Iran could have on the stock market. One might assume that the uncertainty associated with war and its potential negative outcomes could have a devastating effect on stock prices. Historical data provides a very different picture.
LPL reviewed the ramifications of various historical geopolitical events on the S&P 500 Index. Here’s one example. On 9/12/2001, the day after the worst concerted terrorist attack the U.S. had ever experienced, the S&P 500 dropped -4.9%. It declined an additional -6.7% over the next ten days before stabilizing. Only twenty calendar days later the index had completely recovered all its losses.
How about the Boston Marathon bombing? The S&P 500 fell only 3% over the following four days, and then bounced back after only eleven more days.
What about actual wars rather than terrorist events? The start of the Yom Kippur War in Israel in 1973 had very little impact on U.S. stocks. The index fell by less than 1% and recovered in five days. The market’s reaction to the Korean War – which began with the North’s invasion of the South in June 1950 – was a bit more severe. After dropping 13% in a little more than three weeks, it took nearly two months for the S&P 500 to rebound back.
The consequence of Iraq’s invasion of Kuwait in 1990 was more significant. The market fell almost -17% over the following several months and did not recover for another four months. But the worst decline occurred at the start of World War II. The day after December 7, 1941, the stock market began a four month slide that culminated in a nearly 20% loss. It would take another five and a half months for prices to come back.
After reviewing the data I could find no consistent market pricing behavior resulting from the onset of war or terrorism. That makes sense when you consider that lots of other political, economic, and social events were occurring at the same time. For example, in 1990 the U.S. economy was in recession. So who’s to say that it was the Iraq war, the economy, or something else that was the actual cause of the S&P 500 decline?
Notwithstanding the media’s implications of cause and effect (“stocks are down today as worries mount about…”), in reality they (as well as everybody else) haven’t the slightest idea what factors drive short-term stock price movements. More logically you could expect prices on any given day to reflect investors’ expectations of future company performance. Which suggests that an impending war ought to boost defense companies’ fortunes. But before you plow all your hard-earned savings into defense stocks, consider what could happen to those stocks if war doesn’t come. Or if President Trump expands his trade war to more countries.
Despite the gut-wrenching feeling you might experience after an extreme geopolitical event, it would be wrong to assume that stock prices would follow suit. Historically the market hasn’t done especially badly under such circumstances. You would do better to spend your time and energy making sure your investment allocation model appropriately balances asset protection with the level of growth needed to support your future goals. Longer-term that should help you survive even the most worrisome international catastrophe.
Here’s a link to the LPL data: https://lplresearch.com/2020/01/08/how-stocks-do-during-geopolitical-events/.