War and Markets
Armed conflicts are highly charged events that by their very nature generate legitimate and strong emotional responses. While there are many questions and implications around armed conflicts, as long-term investors, an important question is what we should do from an investment perspective? For guidance, we look at how the US stock market has reacted to 16 armed conflicts since the end of World War II.
SUBSEQUENT US STOCK MARKET RETURNS FOLLOWING ARMED CONFLICT SINCE WWII (1950 – PRESENT)
Source: List of armed conflicts from Encyclopaedia Britannica (https://www.britannica.com/topic/list-of-wars-2031197), returns are the Fama-French Market Return Series
The chart above (full data is provided on the last page) shows that median returns were positive following the onset of hostilities, even in the very short-term. The blue bars show the range of returns for each period and the blue dots represent the median results. The yellow + highlights the current Russia-Ukraine conflict. Finally, the note under each bar indicates the percentage of events resulting in a positive market return. The longer the timeframe, the higher the median return, which ranges from a 1% return one week later up to an 18% return one year later. So far, the current conflict is tracking in line with the median results.
From the Behavioral Viewpoint
What is going on?
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War triggers our fight or flight instincts. We are on the lookout for danger and prepared to flee. Our two for one loss aversion encourages us to act to avoid potential loss
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Geo-political events and the constant chatter create a negative recency and availability bias, in which the never-ending stream of dramatic events have the potential to ruin everything.
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We overestimate our ability to evaluate events and their implications and underestimate the randomness of world events. This overconfidence bias can result in emotional decisions which lead to costly behavioral mistakes.
What can we do?
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Individual events are rarely a reliable basis for making investment decisions. Tune out the media when it comes to
investments. Use a consistent approach to monitor the markets and the economy in order to keep emotions in check. -
Use needs-based planning to separate short and long-term investments and to insulate your investments from short-term
noise. Follow a well-developed investment process that delivers critical discipline. -
Work with an experienced behavioral financial advisor. They can provide valuable perspective and coaching to help stay on
track and remain focused on long-term plans and goals.
Table of Armed Conflicts and Returns
Source: List of armed conflicts from Encyclopaedia Britannica (https://www.britannica.com/topic/list-of-wars-2031197), returns are the Fama-French Market Return Series
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The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any AthenaInvest.
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