Russia launched attacks on Ukraine yesterday, marking the start of the next phase in the Ukraine crisis. It makes sense that the markets are already reacting. Before the market opened, U.S. stock futures were down between 2 1/2 percent and 3 1/2 percent, while gold was up by roughly the same amount. The yield on 10-Year U.S. Treasury securities has also dropped sharply. International markets were down even more than the U.S. markets, as investors fled to the more comfortable haven of U.S. securities.
The Markets Are Being Hit Hard
News of the invasion is hitting the markets hard right now, but the real question is whether that hit will last. History shows the effects are likely to be limited over time. This event is neither the only time we’ve seen military action in recent years nor the only time we’ve seen aggression from Russia. In none of these cases were the effects long-lasting.
Historical and Current Events
Let’s look back at the Russian invasions of Georgia and Crimea (which is part of Ukraine). In August 2008, Russia invaded the republic of Georgia and the U.S. markets dropped by about 5 percent, then rebounded. In February and March 2014, Russia invaded and annexed Crimea and the U.S. markets dropped about 6 percent on the invasion, then rallied. In both cases, an initial drop was erased quickly.
When we look at a wider range of events, we largely see the same pattern. The chart below shows market reactions to other acts of war, both with and without U.S. involvement. Historically, the data shows a short-term pullback followed by a bottom within a couple of weeks. Exceptions include the 9/11 terrorist attacks, the Iraqi invasion of Kuwait, and, looking further back, the Korean War and Pearl Harbor attack. Sources: The index referenced here is the S&P 500 Index. Still, even with these exceptions, the market reaction was limited both on the day of the event and during the overall time to recovery. In fact, comparing the data provides useful context for today’s events. As tragic as the invasion of Ukraine is, its overall effect will likely be much closer to that of the Russian invasion of Ukraine in 2014, when Russia annexed Crimea, than it will be to the aftermath of 9/11.
Sources: The index referenced here is the S&P 500 Index.
Still, even with these exceptions, the market reaction was limited both on the day of the event and during the overall time to recovery. In fact, comparing the data provides useful context for today’s events. As tragic as the invasion of Ukraine is, its overall effect will likely be much closer to that of the Russian invasion of Ukraine in 2014, when Russia annexed Crimea, than it will be to the aftermath of 9/11.
Surprising Wartime Market Results
But even with the short-term effects discounted, should we fear that somehow the war or its effects will derail the economy and markets? Here, too, the historical evidence is encouraging, as demonstrated by the chart below. Returns during wartime have historically been better than all returns, not worse. The war in Afghanistan, though not included in the chart, matches the pattern. During the first six months of that war, the Dow gained 13 percent and the S&P 500 gained 5.6 percent. Sources:
Sources: The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks; long-term US government bonds for long-term bonds; five-year US Treasury notes for five-year notes; long-term US corporate bonds for long-term credit; one-month Treasury bills for cash; and the Consumer Price Index for inflation. All index returns are total returns for that index.
Returns for a war-time period are calculated as the returns of the index four months before the war and during the entire war itself. Returns for “All Wars” are the annualized geometric return of the index over all “war-time periods.” Risk is the annualized standard deviation of the index over the given period. Past performance is not indicative of future results.
Expect a Headwind
This data is not presented to say that today’s attack won’t bring real effects and hardship. Oil prices are up to levels not seen since 2014, which was the last time Russia invaded Ukraine. Higher oil and energy prices will hurt economic growth and drive inflation around the world and especially in Europe, as well as here in the U.S. This environment will be a headwind going forward.
Economic Momentum Going Forward
Will we see effects from the headwind caused by the Ukraine invasion? Very likely. Will they derail the economy? Not likely at all. During recent waves of Covid-19, the U.S. economy demonstrated substantial momentum, which should move us through the current headwind until markets normalize. We are already seeing U.S. production increase, which should help bring prices back down—as has happened before. Despite very real concerns and risks the Ukraine invasion has created and current market turbulence, we should look to what history tells us. Past conflicts have not derailed either the economy or the markets over time. Historically, the U.S. has survived and even thrived during wars.
What This Means for Portfolios
Although current events have unique elements, they’re really more of what we’ve seen in the past. Events like yesterday’s invasion do come along regularly. Part of successful investing—sometimes the most difficult part—is not overreacting. If you’re comfortable with the risks you’re taking, you might not be making any changes—except perhaps to start looking for some stock bargains. If you’re worried, consider whether your portfolio allocations are at a comfortable risk level. If they’re not, talk to your advisor.
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Dow Jones Industrial Average (‘the Dow’) is a price-weighted measurement stock market index of 30 prominent companies listed on stock exchanges in the United States.