TSP Planning Report October
How does the market respond to war?
Intuitively, wars introduce economic damage, uncertainty and instability, all ingredients to cause stock markets to fall. This intuition is supported by actual market performance:
- The S&P500 dropped 18% in the three months following the start of World War I, in 1914.
- The S&P500 dropped 30% in the year following the start World War II. Or, more narrowly, the S&P 500 fell by 20.5% and 25.8% respectively during the 22 trading days that followed the Nazi invasion of Czechoslovakia in 1939, and the attack on France in 1940.
- The S&P 500 dropped around 11% in a single day soon after the attack on Pearl Harbor.
- The S&P500 dropped 15% in the 6 months following the start of the Gulf War.
- The S&P 500 dropped over 17% during the Oil Crisis in 1973.
History has confirmed our intuition. The markets don’t usually respond well to war.
However, a couple of ideas to keep in mind:
- ·If the market declines, it doesn’t stay down forever. Eventually it recovers its losses.
- A market decline is not an actual loss until you sell. If you don’t sell, it’s only a paper loss.
Eventually the market recovers its losses.
We’re not naïve. When we invest, we are aware the market has and will have downturns. But they don’t last forever.
Here’s a great illustration of market recovery times:
Source: LPL Research, S&P Dow Jones Indices, CFRA, Bloomberg.
Some recoveries are longer than others. But eventually you get your money back. If you invest bi-weekly, like most Feds do, you will actually be enjoying these temporarily lower prices.
Recognizing how time heals all wounds, including market downturns, you can use time to your advantage – simply be patient and you’ll see the likelihood of losing decrease.
Patience doesn’t just reduce the risk in your portfolio. Patience brings opportunity. As Warren Buffett once said, “the market is a device for transferring money from the impatient to the patient.” Every time the market drops, there’s a transfer of wealth taking place. Which end of the transfer would you like to be at?
Here’s another data set showing the duration of recovery of the DOW Jones:
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Event | DJIA Reaction Dates | Date Range % Gain/Loss | Six Months Later | |
Fall of France | 5/9/40 – 6/22/40 | -17.1% | 7.0% | |
Pearl Harbor | 12/6/41 – 12/10/41 | -6.5% | -9.6% | |
Korean War | 6/23/50 – 7/13/50 | -12.0% | 19.2% | |
Eisenhower Heart Attack | 9/23/55 – 9/26/55 | -6.5% | 11.7% | |
Cuban Missile Crisis | 10/19/62 – 10/27/62 | 1.1% | 24.2% | |
JFK Assassination | 11/21/63 – 11/22/63 | -2.9% | 15.1% | |
US Bombs Cambodia | 4/29/70 – 5/14/70 | -7.1% | 13.5% | |
Arab Oil Embargo | 10/16/73 – 12/05/73 | -18.5% | 7.2% | |
Nixon Resigns | 8/7/74 – 8/29/74 | -17.6% | 12.5% | |
USSR in Afghanistan | 12/24/79 – 1/3/80 | -2.2% | 6.8% | |
Falkland Island Wars | 4/1/82 – 5/7/82 | 4.3% | 20.8% | |
US Invades Grenada | 10/24/83 – 11/7/83 | -2.7% | -3.2% | |
US Bombs Libya | 4/14/86 – 4/21/86 | 2.8% | -1.0% | |
Financial Panic of ’87 | 10/2/87 – 10/19/87 | -34.2% | 15.0% | |
Invasion of Panama | 12/15/89 – 12/20/89 | -1.9% | 8.0% | |
Gulf War | 1/16/91 – 1/17/91 | 4.6% | 15.0% | |
World Trade Center Bombing | 2/25/93 – 2/27/93 | -0.3% | 8.5% | |
Oklahoma City Bombing | 4/18/95 – 4/20/95 | 1.2% | 12.9% | |
Asian Stock Market Crisis | 10/7/97 – 10/27/97 | -12.4% | 25.0% | |
US Embassy Bombing in Africa | 8/6/98 – 8/14/98 | -1.8% | 10.4% | |
September 11th Attacks | 9/10/01 – 9/21/01 | -14.3% | 24.8% | |
War in Afghanistan | 10/5/01 – 10/09/01 | -0.7% | 12.4% | |
Iraq War | 3/19/03 – 5/1/03 | 2.3% | 15.6% | |
London Train Bombing | 7/6/05 – 7/7/05 | 0.3% | 5.6% | |
Bear Stearns Collapse | 3/14/08 – 3/14/08 | 0.0% | -4.4% | |
Average |
| -5.7% | 10.9% | |
Source: Morningstar and Bloomberg. As of December 31, 2019. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928. Indices are unmanaged and their returns assume reinvestment of dividends and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index. The performance data quoted represents past performance, which is no guarantee of future results.
The table above highlights 25 international crises. In all but four cases, the DJIA returned to positive territory within six months of the end of each decline.
If you don’t sell, it’s only a theoretical loss:
Just as important to keep our emotions at bay is recognizing that you didn’t lose money when the market declines. The market has declines on a daily basis. If you slept thru the day, you wouldn’t even notice nor worry. The only people who lose money with market declines are those who don’t give it the time and sell while it’s down (the “impatient” as Buffett said, above).
Bottom Line:
Wars disrupt economies, create uncertainty and are usually reflected in the short term after the start of the war. However, after the war, and even during the war, economies make their adjustments, companies continue to seek ways to be profitable, and investors eventually regain confidence and buy up the market, again.
Hold tight!
If you are within 5 years of retirement, you should email me to get a more customized recommendation.
If you have any questions, feel free to contact me.
Email me here – stephen@stephenzelcer.com
