Fears of a major conflict between Russia and Ukraine/NATO intensified over the past week as White House officials urged all U.S. citizens to leave Ukraine as intelligence suggests ‘major military action very soon’. Of course, diplomacy can, and we hope, prevail but in case it does not we wanted to look at the effects war has on the stock market. The conclusion is stocks tend to have drawdowns but that the old adage ‘sell the rumor, buy the news’ is the historical pattern.
The study below from LPL Research shows drawdowns and days until recovery (the length of time to recover all losses from the drawdown). S&P 500 drawdowns tend to be very shallow with the average drawdown of 4.6%. There were a few outsized losses with 2001 and 1990 standing out but those were during recessionary economic periods, and right now our economy is very strong. With the small losses, the recovery time to recoup the losses was also very small at 43 days on average.
Additionally, we analyzed data from Ned Davis Research on forward S&P 500 returns from the event date. On average, the S&P 500 gained 5.10% over the next 63 days and 8.35% over the next 126 days.
This is not meant to downplay the seriousness of this situation. Specifically with Russia, there could be major disruptions to commodity markets, and energy markets more precisely, which could cause greater drawdowns than the historical averages. However, analyzing historical periods of conflict equity markets tend to take it in stride as the advancing economic locomotive and earnings growth win out.
Sean Dillon CMT, CFTe®
Vice President of Investment Strategy
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