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What is the war doing to my portfolio?

A look at the average number of days it took markets to recover after each conflict provides perspective to remember the bigger picture.

Dear investor,

The past few weeks certainly have not been easy to digest when looking at your investment portfolio. I think we can all agree the Russian/Ukraine conflict is lasting much longer than any of us have expected – if we expected anything at all.

I would like to take a trip down memory lane and assure you that this will end at some point – and your portfolio will recover. We need to remain patient, resilient and ineffective (yes – sometimes NOT doing anything can save you!)

The graph below illustrates how equity markets (specifically global in this case) react to conflicts, but also how they recover every single time – and mostly quicker than we anticipate.

If history repeats itself (which it normally does in market reactions), the market will shrug this off and move on. Fundamentally we are still invested in good companies, which will remain relevant and absorb this conflict. We only need to allow some time. The nature of the stock market is to react, quite emotionally sometimes, to major events. But recovery always takes place with time.

From the beginning of WW2 to its end, the DOW was up more than 50%, over 7% per year. During both combined world wars, the stock market grew 115%.

The old saying that it’s a good idea to buy when there’s blood on the street turns out to be – quite literally – true.

Looking back, I think we can be assured that this too shall pass:

  • The biggest drawdown in history due to war was in conjunction with Nazi Germany’s entry into what was then the Czechoslovakian nation in 1939, and the attack on France in 1940. The S&P 500 fell by 20.5% and 25.8% respectively during the following 22 trading days. One year after these instances, the market was up almost 19% and 9.2% respectively, eliminating much of the drop.
  • During Pearl Harbor, S&P 500 dropped around 11% in a single day. As we all know, the US declared war on Japan the day after, and on December 11 that year, Germany declared war on the US (with the US declaring war on Germany the same day). Despite all this turmoil, S&P was up 15.3% higher one year later.
  • During the oil crisis in 1973, S&P 500 fell by more than 17%. This was also followed by the slowest recovery since the second world war.

War and conflict bring sudden crashes/volatility, ranging in their degrees. But usually, the recovery is relatively quick and positive.

On average, the S&P 500 has been 6.5% in negative territory three months following an armed conflict (either global or smaller), and around 13% positive 12 months after the conflict.

When we take a look at the average number of days to recover after each and every conflict in its isolation, it provides perspective to remember the bigger picture, and that building a resilient investment portfolio is a long term journey.

Geopolitical Events/Stock market Reaction (LPL Financial)
Source: Seekingalpha.com

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