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How markets overcame past geopolitical crises

LiveMint logoLiveMint 12-04-2017 Ben Carlson

Washington: According to a survey by the CFA Institute, more than two-thirds of global investment professionals expect the geopolitical climate to affect investment returns over the next three to five years. And a full 70% of respondents expect these changes to negatively affect market performance.

In the past nine months or so, the world has seen its share of upheaval, starting last June with the Brexit vote and continuing in November with the election of Donald Trump as president.

On 6 April, another geopolitical crisis erupted as Trump ordered Tomahawk missile strikes on a Syrian air base in response to a suspected chemical attack on civilians by the regime of President Bashar al-Assad.

No one knows if things will escalate or if this will turn out to be a one-off event, but investors should be aware how the markets have reacted to geopolitical events in the past.

In the six months following the onset of World War I in 1914, the Dow dropped more than 30%. That year, the stock market closed for six months, the longest it has ever been shut, because liquidity all but dried up. But in the following year, it rose more than 88%, which remains the highest annual return on record for the Dow Jones Industrial Average.

In fact, from the start of the war in 1914 until it ended in late-1918, the Dow was up more than 43% in total, or around 8.7% annually.

Hitler invaded Poland on 1 September 1939, which began World War II. When the market opened on 5 September, the Dow actually rose almost 10% in a single day.

When the attack on the US naval base at Pearl Harbor occurred in early-December 1941, stocks opened up the following Monday down 2.9% but it only took a month to regain those losses. From the start of WWII in 1939 until it ended in late-1945, the Dow was up a total of 50%, more than 7% per year.

The Korean War began in the summer of 1950 when North Korea invaded the South. That conflict ended in the summer of 1953. In that time, the Dow was up an annualized 16%, or almost 60% in total.

US troops were sent to Vietnam in March of 1965. The Dow would finish the remainder of that year up almost 10%. By the time the last of the US troops was pulled out of Vietnam in 1973, the stock market was up a total of almost 43%, or just under 5% per year.

The Cuban Missile Crisis had the world on the brink of nuclear war in October of 1962. The confrontation lasted 13 days from 16 October to 28 October 1962.

In that two-week period the Dow remained surprisingly calm, losing just 1.2%. For the remainder of that year the Dow would gain more than 10%.

President John F. Kennedy was assassinated a little more than a year later in Dallas. The market opened up 4.5% the day after.

Stocks finished up the following year, 1964, more than 15%.

Stocks dropped 13.3% in the three weeks following the Gulf War in the summer of 1990. From July of that year through October, the S&P 500 dropped 19.9%, but this also coincided with recession.

The attack on US soil on 11 September 2001, saw stocks fall sharply, down almost 15% in less than two weeks following the tragedy. The economy was already in the middle of a recession at that point and stocks were still falling from the technology bubble but within a couple of months the stock market had made back all of its losses from 11 September.

The US invaded Iraq in March 2003. Stocks rose 2.3% the following day and finished up the year with a gain of more than 30% from that point on, though this followed the end of a brutal bear market.

You can see that stocks have a mixed record when dealing with international conflicts. There’s no road map to follow should things get out of hand anywhere in the coming years.

Making financial decisions in the face of geopolitical uncertainty can be a scary proposition so investors need to realize that there are certain things that are out of their control.

Predicting geopolitical events is no easy task. Predicting how markets should respond to those events may be even harder. Bloomberg

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