Military actions and the financial markets
After such a stellar 2019, we spent some time thinking about what might transpire that could upset the current upward trend in the stock market during 2020.
We came to the conclusion that it would most likely be one of three things, two of which include would be the following – a too aggressive Federal Reserve or a too left-leaning Democratic nominee (see Elizabeth Warren and Bernie Sanders). We concluded that the third event that could cause a downdraft in the financial markets would be a geopolitical event. Little did we know that less than one week into the new year, investors would have already had to deal with significant geopolitical turmoil in the middle east.
The Trump Administration and the United States military in retaliation to the ransacking of our embassy in Iraq commenced an airstrike in Baghdad that ended up killing perhaps the second most powerful person in Iran, General Qassam Soleimani. Soleimani, a mortal enemy of the United States, was the head a division of the Iranian military that in addition to the event at the embassy, was responsible for extraterritorial military and clandestine operations.
In short, for over the past two decades he was the leader of military operations outside of Iran. Soleimani has had a controversial career to say the least, including support of Syrian president Basharal-Assad, the man responsible for the chemical attack in 2017 which killed at least 90 civilians and injured hundreds of others.
In retaliation to the strike against Soleimani, Iran fired missiles at U.S. forces stationed in Iraq very early Thursday morning, January second. Thankfully, none of our servicemen or women were killed.
The market initially tumbled 400 points in premarket trading but recovered to open down a little over two hundred points. This selloff and subsequent rally prompted us to look back to see what the impact was of other more severe military actions in the past. Initially, both retail as well as professional investors, led by computerized algorithmic equations often responded by selling.
However, ultimately it has proven wise to be patient during these events and respond in an unemotional, objective manner. That might result in eventually repositioning your portfolio or more beneficially, remaining on the sidelines and let the dust settle.
Here are some examples of geopolitical events and the effects they had on the market.
According to data researched by Ben Carlson and outlined below, over the six months following the start of World War I the Dow Jones Industrial Average (DJIA) dropped more than 30 percent, after which it was decided to eventually close that exchange for the balance of the year. However, the following year, the market was rebounded more than 88%, the highest annual return on record for the Dow.
In fact, annual returns during World War I averaged 8.70%.
The stock market responded in a similar fashion during World War II, falling initially but then rising approximately fifty-percent for the years 1939 through 1945, providing an annual return of 7.00% per year. These are two of the most devastating wars in human history and the market still had above respectable returns.
The stock market responded similarly after the Japanese attacked Pearl Harbor, initially falling 2.9% but recovering over the following month. However, after the terrorist attacks on September 11, 2001, the broad U.S. stock indices fell nearly 15% over the following two weeks. It is important to note that the U.S. economy was mired in a post internetbubble recession at that time. In fact, the S&P 500 was down more than 17% during 2001 year-to-date.
The market is continually evolving and learning from the response of investors during prior events in an effort to predict future outcomes. Historically and as is evidenced by the events referenced above, responding immediately generally has been unwise. Unless the direction of the economy is significantly altered by the event or series of events, we believe that the market trend in place at that time will remain intact.
This will probably hold true today.
On a closing note and loosely related to the above, investors might take notice of the response of the financial markets to the tweets from President Trump. Initially, after recently elected, the markets responded violently. Today, not so much.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.