By Ethan Currie, Staff Writer
The Russian-Ukrainian War had begun in February 2014. Conflicts between Ukrainian and Pro-Russian separatist forces, rising political tensions, cyberwarfare and naval incidents had all contributed to a Russian military build-up on Ukraine’s border. A full-scale Russian invasion of Ukraine was launched on February 24, 2022, nearly a decade since the conflict had begun. The past month alone has had a devastating impact on the lives of many.
War has and will continue to come with a massive price – most notably, a loss of innocent lives. In conjunction with social, political, and economic uncertainty, it is easy to understand why the Russian-Ukrainian war impacts more than just two countries and their people. Increasing globalization has yielded broader implications for economies all over the globe, especially when considering militarized conflicts.
The recent financial market volatility has been no surprise. Investors struggle with the cumulative frenzy of inflation highs, slowing global growth, pandemic recovery, and on top of all that, a war in Europe resulting in the worst refugee crisis since the Second World War. The S&P 500 is down roughly 5.5% since the start of 2022, although has experienced a decent recovery of about 8.6% since the year-to-date low on March 8, which likely resulted from fears of continued Russian-Ukrainian conflict.
Despite the 40% crash seen in the MOEX Russia index, North American, European, and other global markets have not experienced a massive drop due to conflict in Ukraine. In fact, historic stock performance during times of war has been surprisingly positive in the medium to long-run, following periods of short-term price volatility, as Western investors are seeing today.
By observing the S&P 500’s performance around notable geopolitical and militarized events, investors may feel a little more at ease in regard to the current Russian invasion. For example, in the 6 months following the September 11 terrorist attack on the World Trade Center in 2001, the index had rebounded 6.7%. The Cuban Missile Crisis caused a total drawdown of 6.6%, just prior to an S&P rally which revealed a 32% gain over the next 12 months.
The Japanese bombing of Pearl Harbor on December 7, 1941 resulted in a one-day crash of 3.8%, before reaching a total drawdown of 19.8% 143 days later. This result signaled the United States’ entry into World War II, and yet, one year later, American markets had returned to their previous levels.
Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, stated that, “from the start of World War II in 1939 until it ended in late 1945, the Dow [Jones] was up a total of 50%, more than 7% per year. So, during two of the worst wars in modern history, the U.S. stock market was up a combined 115%”. He continued to say that “the relationship between geopolitical crises and market outcomes isn’t as simple as it seems.”
The financial markets have showed tremendous resilience in response to war, terrorism, and militarized conflicts throughout history. Although the battle between Russia and Ukraine continues, investors should understand that stock indices have “weathered heightened geopolitical tensions in the past,” according to LPL Financial Chief Investment Strategist, John Lynch. Uncertainty in the near future may proceed, but many financial professionals are confident that market reactions to the Russo-Ukrainian war will mirror those reactions seen in response to wars of the past.“
Over the last few years, markets have been conditioned not to overreact to political and geopolitical shocks for two reasons: first, the belief that there would be no significant subsequent intensification of the initial shock; and second, that central banks stood ready and able to repress financial volatility,”, said Allainz Chief Economic Advisor, Mohamed A. El-Erian, in a Bloomberg column. So, despite current uncertainty in a time of war, investors can remain certain of a market recovery – the question is not if, but rather when this will occur.