Instability and Unrest: The Market’s Reaction

With the recent turmoil unfolding in Afghanistan, should you be worried about a drop in the stock market and its negative impact on your portfolio?  Well, as they often say, history repeats itself.  This situation may be no different.  In the short-term, markets typically drop as a result of significant conflicts, wars, and geopolitical events.  But counterintuitively, markets are known to recover rather quickly, even while uncertainty persists.

Let’s look at just a few past major events and the market’s reaction:

WW II (1939-1945)

• Surprisingly, four days after the invasion of Poland on September 1, the Dow shot up 10%.
• The market rose 50% from the start to the end of the war, an annualized return of about 7%.

Korean War (1950- 1953)

• From the start of the conflict to its end in 1953, the Dow had risen a collective 60%, representing a 16% annualized rate of return.

Cuban Missile Crisis (October 1962)

• The Dow lost 1.2% in the 13 days of heightened alert, but in the remaining two months of the year, it gained over 10%.

The 9/11 terrorist attacks (2001)

• The stock market fell 15% in under two weeks, albeit when stocks were also dropping from the dot-com bubble burst and the market in a recession.
• In a few months, however, the stock market made back all that it had lost.

The COVID pandemic (2020- ?)

• The stock market dropped 37% between February 12 to March 23. By the end of 2020, the Dow was up 7.3%, the S&P gained 16.3%, and the Nasdaq rose 43.6%.  Presently, the stock market has continued to reach many record highs in 2021.

Collectively, if we look at the years of war between 1926 and 2013, the average annual return was 1.4% higher than the average return for all years combined.  On top of that, these higher returns came with an improbable lower level of volatility in the market!

As the following chart shows, markets have weathered past conflicts well, with recovery always on the horizon.

Unfortunately, conflicts put downward pressure on the market.  However, as the situation progresses, history has shown that stocks improve.  Headlines are unsettling, and future conflicts are inevitable, occurring without warning.  Even with the current troop withdrawal in Afghanistan and resulting tension and danger within the country and worldwide, history reminds us to stay the course.  Ignore the persistent investment noise and relax, knowing you have a plan for your future success.

The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S. The Dow Jones Industrial Average Index (DJIA) is an index that tracks 30 large, publicly owned companies trading on the New York Stock Exchange (NYSE) and the Nasdaq. The Nasdaq Composite Index is the market capitalization-weighted index of the common equities listed on the Nasdaq stock exchange.