The U.S. military strike against a Syrian military base earlier this month, heightened concerns about the North Korean nuclear threat, and recent terrorist attacks in France and elsewhere have caused many to ask what these risks might mean for the stock market. It is always uncomfortable to talk about economic or market impact during a humanitarian crisis or military operation when lives are being lost, but we try to help investors by providing some historical context.
After the news of the strike in Syria broke, Dow Jones Industrial Average futures immediately fell 100 points overnight during the morning of April 7. But as more domestic traders digested the news and became involved in futures markets, those losses were erased. The S&P 500 Index has been flat since then despite this and other geopolitical concerns. Should markets be more concerned?
Here is where historical context can help. First, our disclaimer: Every event is different, and no one knows with any degree of certainty which crises will escalate and which ones will be contained. That said, when looking back at previous military conflicts in recent decades, we can see that the stock market has generally shrugged them off; recouping losses, if any, within days or weeks. Thanks to our friends at Ned Davis Research, we have a fairly long list of crises—some economic, some related to market imbalances, some military conflicts, some terrorist attacks, and others—and the stock market performance after those events.
The most obvious takeaway is that the initial reactions are typically negative (median first day drop of 2.3%, average decline of 4.6%), but after the first month (roughly 22 trading days), the Dow has tended to be between 3% and 5% higher (and typically continued to rise beyond the first month). Perhaps the most important takeaway is that the business cycle has a substantial influence on the market’s reaction to these crisis events. The sizable stock market declines associated with the Arab oil embargo (1973), Nixon’s resignation (1974), the Hunt silver crash (1980), Iraq’s invasion of Kuwait (1990), 9/11 (2001), and Lehman Brothers’ collapse (2008), were all in or around economic recessions. The crises and corresponding big declines that took place amid healthy U.S. economies—the crash of 1987 and the Asia crisis in 1997—are more the exception than the norm. Finally, even during the more significant market-moving events, investors were very likely to experience gains three, six, and 12 months later. Patience was rewarded.
Bottom line, this look at history tells us that the stock market tends to be resilient to crises, and the market’s reaction is greatly impacted by where the economy is in the business cycle. The conflicts that have triggered the biggest declines tend to be associated with economic weakness, which is why we in the LPL Research Department spend so much time analyzing the business cycle (please see our Recession Watch Dashboard). We will continue to assess potential economic and market impact from geopolitical events or any other crisis that may emerge, and we acknowledge the risks; however, from a stock market perspective, the fundamentals of the business cycle will carry the day.
