When the winds of war blow over the markets, investors stay in the trenches. Before the outbreak of a conflict, volatility takes over the trading floors and stock market operators seek shelter in the so-called safe-haven assets, that is, those values that, even in times of uncertainty, tend to maintain their estimate. Gold, fixed income funds and hard currencies are some examples. However, with the figures in hand, it seems that the markets do not disdain the war. After bottoming out, it doesn’t take long for the indices to regain their vigor and, according to analysts, right now the premises are in place for Russia’s invasion of Ukraine to confirm this trend. Although, the specters of inflation remain in the shadows and can give rise to any surprise.
Mark Armbruster, president of the eponymous investment firm, has observed the behavior of stock indices in four war events: World War II, the Korean War, the Vietnam War and the Gulf Wars. The expert has concluded that in the Second World War the large capitalization companies on Wall Street rose by 16.9% (those of small capitalization 32.8%). A great leap forward was also noted in the other conflicts analysed, except in the dispute between Saigon and Hanoi. “This war was very short,” notes Armbruster, “and it coincided with a rise in oil prices that helped push the economy into a brief recession.” Investors do not fear wars, but the lack of control over the events that precede them.
A study by Deutsche Bank has analyzed the behavior of the S&P 500 —considered the most representative index of the real situation of the markets— during the most important geopolitical events of the last 80 years. From the German occupation of Czechoslovakia in 1939, which started the second world conflict, to the bombings in Syria in 2017. According to this analysis, the stock markets have taken an average of 15 sessions to raise their heads and recover their value prior to moments of crisis . “When global conflicts arise, there is usually great volatility with a strong initial drop, which can last a few weeks or a few months. As an exit is glimpsed, the indices tend to advance to record highs, ”says Javier Molina, an analyst at eToro.
The cases of the attack on the Twin Towers on 9/11 and Brexit are exemplary in this regard. After the attack, the US selective lost 11.6% and, taking into account that the New York Stock Exchange was closed a week after the attack, it took three weeks for it to reach its pre-crisis peak again. With the British referendum, the rebound was even faster. From June 27, 2016, when the S&P 500 bottomed out, it took only two weeks for it to emerge again. Once again, the markets were one step ahead of the facts and thus discounted the future recovery. In fact, especially in the British market, the exit of the United Kingdom from the EU began to take its toll already at the end of 2015, according to Diego Morín, an analyst at IG.
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The recovery was not as quick in all geopolitical events. After the Yom Kippur War in 1973, in which Israel and the Arab countries clashed and led to an oil embargo on the West, the index had to wait four years to recover. “The economic context dominates the market response around the shock geopolitical. The oil embargo had a clear negative economic impact and was instrumental in fueling a recession that led to a severe and long-lasting sell-off in equities,” said Parag Thatte, author of the Deutsche Bank study.
For his part, Molina argues that the market has changed a lot since the 1970s and neither the actors nor the information to which they had access in this regard was the same. What does seem to be a constant is that it seems more difficult for stock markets to breathe a sigh of relief when raw material supply problems come into play.
The biggest plunge in US stocks remains outside of geopolitics. With the Lehman Brothers bankruptcy in 2008, the S&P 500 plunged more than 40%, only to recover after almost two years. More recently, a strong blow was also inflicted by the first wave of coronavirus in March 2020. A crisis from which the parquet came out five months later, when, after the economic paralysis due to confinement, the economy was preparing to return to start their engines.
The current conflict in Ukraine confirms that the markets do not like uncertainty. The consequences of the war on the prices of raw materials feed an inflation that the central banks were already struggling to appease. Many international companies have cut the umbilical cord with Russia, while the Moscow Stock Exchange has been closed for a week. The ruble sinks to a minimum and in the face of severe sanctions imposed by the West, credit rating agencies downgrade Russian debt to junk bonds.
Although the stock markets have been aiming for nowhere since the beginning of the year, experts expect that when the geopolitical issue is cleared up, the rebound will take place quickly. However, the indices will again face the risks of before, such as the impact of rising prices on economic growth and interest rate hikes by key monetary authorities. These pending questions will calibrate the compass that will guide the movements of investors in the short and medium term.
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