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Geopolitical events rattle markets – they rarely derail them.
When Russia’s military poured over the Ukrainian border last week, the market sell-off was as predictable as the almost unanimous global condemnation of this naked aggression against a sovereign state.
Stocks were sold off – the bellwether S&P500 is down nearly 10% in 2022 although this has also been prompted by fears of higher interest rates – as investors fled to the safe havens of gold and bonds. In Australia, investors tore more than $73 billion off the value of shares in a day’s trading.
The other market consequences were to see a sharp rise in the oil price as it topped $US100 a barrel for the first time in eight years (Russia is the world’s third largest oil exporter and second largest gas exporter), some metal prices followed suit (nickel surged past $US25,000 for the first time in a decade), as did wheat and corn, where the Ukraine and Russia are major players in the world market.
That investors are nervy is totally understandable. Markets hate uncertainty and that’s exactly what a geopolitical event is. In the short-term, concerns have been heightened about the impact on Europe’s natural gas supply and what that will mean to industries recovering from the pandemic, while a higher oil price will have global implications, especially for inflation. The sanctions being imposed on Russia are a double-edged sword, with the fallout impacting on those applying the sanctions, with Europe again potentially the major casualty.
What has compounded the market sell-off is investor unease that has been fuelled by central banks preparing to unwind years of quantitative easing to combat rising inflation and inflation expectations (see oil price above). The banks want bond yields to rise at the very time investor thirst for capital security is likely to see bond yields fall.
But investors should not lose sleep over the Ukraine – or, more accurately, should not lose sleep over the market implications. The political and humanitarian issues are another matter altogether.
As Deutsche Bank’s Jim Reid told Reuters, sell-offs in the S&P resulting from geopolitical events have typically been short-lived, with the index falling some 6% to 8% on average, taking three weeks to reach a bottom and another three weeks to recover to prior levels. This is reassuring to know as the bloody events in the Ukraine continue to unfold.
History tells us Reid is on the money. On the first day of NYSE trading after September 11, the Dow Jones index fell 684 points, a 7.1% decline, setting a record at the time for the biggest loss in the exchange’s history for one trading day (since eclipsed by the market reaction to COVID). The close of trading that Friday ended a week that saw the biggest losses in NYSE history with the Dow Jones down more than 14%, the S&P 500 off 11.6% and the Nasdaq 16%. All up, an estimated $1.4 trillion in value was lost in a week.
Yet in the two decades since September 11, the S&P 500 has risen nearly four-fold, despite periods of steep declines, including the GFC-induced recession and the pandemic. That’s worth remembering when markets are volatile.
Remember, too, those other geopolitical that have induced market sell-offs: the early days of Donald Trump’s presidency (especially the China trade war), fears of populism in Britain (think Brexit), Poland, and Hungary and their potential to destabilise the EU, to that perennial flashpoint, the Korean Peninsula. Today, we can add Taiwan to the list.
Taking an even longer historical perspective, the evidence shows there is little correlation between major geopolitical events and share market upheavals. The most infamous share market crash was 1929, an event that ushered in the Great Depression. Yet the world was relatively politically stable when Wall Street crashed in 1929 and equity markets around the world followed suit; Hitler had yet to come to power, Mussolini’s military goals were still on hold while Japan’s territorial ambitions were limited to Manchuria in a politically bankrupt and divided China.
It was largely economic events that saw markets struggle in the 1930s. Using the American S&P 500 as the bellwether index for global share-market activity, it was one of only two decades in the past eight up to 2010 that saw market returns retreat. The other, not surprisingly, was 2000-09, and as we have seen the first two decades of the 21st century have been kind to investors.
Over an 80-year period, 1930-2010, major geopolitical events have jolted markets, but not derailed them. Even Pearl Harbor pushed the market down – but it soon rallied. Indeed, the bull market of the 1950s started well before World War 11 ended and wasn’t interrupted by the Korean conflict with all its Cold War ramifications in the early 1950s. The Cuban missile crisis (1962), Middle East conflicts (and where they did it was because of the oil price, not the political fall-out), and, as explained, even September 11, all came and went without sustained market sell-offs.
Yet investors always seem to panic. Or, at least, initially. For the cannier, it opens up buying opportunities at lower prices. Perhaps they are listening to what the economists are saying. They might be boring but their comments about the long-term economic and commercial impact of a geopolitical event will be far more germane to a portfolio’s performance than anything politicians say. And that includes Putin. History says so.
