As the world watches the Russian invasion of Ukraine, investors have been hitting the panic button. Major global stock markets year-to-date are down in the range of 8-14%, while the TSX Composite Index is only down 1% given its large weight towards the resource (energy/metals) sectors.
Unfortunately, military conflicts have been a tragic part of human history for hundreds of years. In the 20th century and even the 21st century, these conflicts continue to occur every few years. In the short term, these events or even the threat of a conflict are bad for stock markets since the uncertainty causes investors to emotionally sell which leads to a market correction.
However, in the long-term, military conflicts have a positive effect on the market as follows:
- provide a buying opportunity for patient investors as other investors panic based on either locking in profits or emotional selling
- eliminate some of the excess speculation and froth in certain sectors of the market(i.e. technology stocks/cryptocurrencies)
- provide a reset for the economy in terms of future interest rates and economic growth
History shows us that stock markets do recover from wars. Using the U.S. stock market index – the S&P 500 Index, the chart below shows the recovery time from the date of the event.
Market Recovery from Geopolitical Events Days Between Event and S&P 500 Recovery to Pre-Event Levels
Source: GeoEconomics Center Calculations;, LPL Research, Bloomberg, CFRA • Incidents before 1957 rely on the S&P 90, the predecessor index to the S&P 500.Market reaction to the 2014 Russian annexation of Crimea came after the event when major sanctions were imposed the following October
No one knows how long the Russia/Ukraine war will last however, it will likely be short-lived given the lack of NATO military forces involved.
We believe stock markets will recover based on the following:
- the global economy remains strong with the International Monetary Fund estimating 2022 global GDP growth of 4.4%
- interest rates may not go up as fast as investors expect given the negative sentiment regarding the war
- corporate hiring remains strong
So what should investors do now?
- If you're fully invested stay the course with your asset allocation
- If you have cash on the sidelines start averaging into the market
The Bottom LineAs we discussed in our 2022 Outlook, we expected a choppy year for markets. The combination of geopolitical threats, rising interest rates, Omicron, and peaking earnings growth creates stock market uncertainty but provides an attractive buying opportunity for patient long-term investors.
Anil Tahiliani, MBA, CFASenior Portfolio Manager, Canadian EquitiesLocal: +1-403-718-2130