Conflicts and Markets

The Russian invasion of Ukraine is the most aggressive military action to happen in the European region since World War 2. From the perspective of the capital markets too, this has been a dramatic event. Since the beginning of the invasion, the world markets have encountered bouts of acute volatility. The Russian market has been the worst performer with a 50% decline, as equities in the country collapsed on the back of crushing sanctions. The snapshot below shows the change in some of the market indices across the world.

Source: Morningstar

This is not the first time that markets have taken a hit in the wake of geopolitical events. Since the time publicly traded markets have existed, there have always been external shocks like wars and territorial disputes that have played a role in market prices. Some of the largest such events in the past include World War 1, World War 2, Korean War, Vietnam War, and the two Gulf wars.

In the next segment, we will look at a couple of the major such events and how the market reacted during and after the course of the event.

The Gulf War – 1990

When Saddam Hussein’s forces accumulated in the borders of Kuwait, the world witnessed one of the largest conflicts in the middle east with repercussions across the whole world. Given the region’s overwhelming influence on energy prices, the war had an enormous economic impact as well. As expected, the markets corrected sharply in the immediate days after the invasion. However, with US support to Kuwait and a prolonged battle between the forces, the markets remained volatile. When the dust settled, the markets started to stabilize again. Within the next two years, the markets were on track to post new highs. From the lows of the correction in the early 1990, the markets went up over 50%.

Source: Morningstar

The 9-11 Attacks and Aftermath:

The coordinated terrorist attacks on the world trade center building in New York, the Pentagon, and a foiled hijacking over Pennsylvania, on September 11, 2001, together formed what is probably the most significant act of violence after the two World Wars. The events of 9-11 shocked the entire world and its repercussions are felt even now, after over 20 years since the events of that fateful day. The event without precedence resulted in the markets remaining closed for a week. When markets opened, the Dow fell 7% and ended the week down 14%. Airlines, tourism, and other services stocks were hammered during the week. In the aftermath, several geopolitical developments across the world kept the markets in a nervous jittery state. These included the US’ war on terrorism in Afghanistan and later in Iraq.

With a prolonged war-like situation, the markets continued to encounter bouts of volatility over the next year or so. However, from the bottom in late 2002, the markets started to soar again. In the two decades since then, the S&P has grown nearly four times, making the US the largest market in the world by a wide margin. US equities now account for 60% of the entire world by market cap.

Source: Morningstar

Conclusion:

Wars and natural calamities have a deep impact on the markets in the short term. Based on events, markets tend to find a natural equilibrium and tend to rebound every time. If a country can grow its GDP at a healthy pace, maintain law and order and improve the living standards, the markets tend to do well. Ultimately, markets reflect the earnings power and profitability, and growth of the corporations that make it up. It is paramount to maintain a disciplined and systematic investment routine to generate wealth in the long run. Equity markets offer probably the best way to generate long-term wealth. ETFs and curated portfolios like Globes offer an even simpler way to stay invested in the markets.