11 March 2022

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Even with the war, you can win on the stock market

Author: Luigi Campopiano

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The condition of the financial markets seems very negative even if, reading carefully between the lines, it turns out that the war in the past has always represented moments of market growth. Will it be like this time too?

Global markets generally recover from wars and disasters and are likely to do so again: they usually weaken as wars approach, strengthen long before wars end, and treat human calamities with breathtaking indifference.

President Putin has rocked stock, bond, and commodity markets worldwide: Putin's Sunday announcement that he recognizes the sovereignty of two Russian-dominated separatist Ukrainian regions and that he has ordered the dispatch of Russian troops represented a serious increase in the risks of a very big war. It is unclear where the conflict is headed, but the short-term market implications are. The short-term consequences for the markets are relatively simple: energy prices will continue to rise, and stocks will continue to fall.

Not all stocks are down, though: Rising oil and gas prices have strengthened the S&P 500's energy sector (US investors have invested nearly $ 140 billion in commodity ETFs, mainly those focused on energy), the best this year, with a return of over 20%. This happened even though the general index, which often serves as an indicator for the entire stock market, fell by more than 10%.

Several problems have plagued the stock market in general: fears of rising interest rates, sizzling inflation, and continuing supply chain bottlenecks. Russian threats to Ukraine are likely to hit the market further: stocks fall amid global turmoil, and US Treasuries tend to rise.

Weathering the storm in the stock market was a good long-term strategy: A year after the bombing of Pearl Harbor in 1941, the S&P 500 gained 15%; a year after the US invasion of Iraq in 2003, it increased by 35%. History shows that just a year after most of the shocking stock market crises, the S&P 500 stock index rose.

Russian hostilities in Ukraine could be the beginning of something much bigger: a geopolitical shift that leads to a 21st century Cold War. But even if that were the case, would it be bad (financially) for prudent and diversified investors who live far from danger zones?

The Cold War was destructive and debilitating for large populations. Still, it was an excellent time for equity investors: from President Truman's speech to Congress on March 17, 1948 (criticism of the USSR's expansion of communism into Eastern Europe ) until the end of December 1991 (end of the USSR), the Dow Jones yielded 10.05% per annum. Since then, through Friday, the Dow has returned 10.77% annually. Differences? Almost nothing.