By: Investor Solutions, Inc.
With three wars waging in the Middle East and the menacing nuclear weapon ambitions of Iran, Syria and North Korea, most wonder whether this is a good time to be in the market. Are we on the verge of World War III? If so, what would be the effect of a major war on investments? Would it warrant a drastic change in strategy: a sell-off followed by a repositioning in stable securities (i.e. cash)?
Most risk-averse investors will find that selling off their securities and placing them in a safer investment would make sense. Markets are bound to behave erratically in an environment of rising uncertainty such as in time of war. It’s a matter of waiting out the storm, and reinvesting when the time is right. Unfortunately, it’s not that simple.
A strategy, as the one described above, would only make sense if the following was true: investors were able to predict the market’s reaction to war, the timing of and the extent of the market decline (if it occurs) and properly identify the recovery period.
The reality is that there is no way to predict what will be the short-term effects of this war on global markets. Neither the timing nor the magnitude of global markets’ reactions to war is predictable. Evidently, market swings will be conditional upon the nature of the conflict: length, the geographic location and the players involved in the war (to name a few). But, this is the extent of my predictions.
So what is a concerned investor to do?
Periods of heightened uncertainty, just as in times of war, offer an opportunity to re-evaluate risk tolerance as it is the best time to truly understand the impact of risk on investments. Financial plans should be reviewed to ensure that the level of risk undertaken is appropriate. Once that is completed, stay put!
Easier said than done!
I have decided to illustrate my point by looking at market performance during the following periods: World War II, the Vietnam War, the 1973 Oil Crisis and Desert Storm. This study of past events is not indicative of what will happen in the future but will serve as a reminder and a reassurance. We have been marked by many conflicts, large and small. Humanity, and for that matter, economies have survived and recovered.
A Lesson in History
World War II (1939-1945) was the longest and deadliest war in history. Vast areas of Europe, eastern Asia and North Africa become battlefields. Estimates of the death toll attributable to the war for military and civilian losses have ranged upwards of 60 million, with civilian losses at or more than 50 percent of that total. The total market return for this period was 107.41%.
The Vietnam War (1961-1975) was the longest period of war for America. It was a conflict where the Democratic Republic of Vietnam (North Vietnam) fought against the Republic of Vietnam (South Vietnam). Numerous other nations were involved in the conflict including the United States, Australia, New Zealand, South Korea, the Soviet Union and the People’s Republic of China. There were more than 9.2 million service members deployed worldwide and 1.1 million casualties. The total market return for that period was 129.65%.
The Yum Kippur War and the Oil Crisis (1973-1974). Members of Organization of Arab Petroleum Exporting Countries (OAPEC, consisting of the Arabmembers of OPEC plus Egypt and Syria) announced, as a result of the ongoing Yom Kippur War, that they would no longer ship petroleum to nations that had supported Israel in its conflict with Syria and Egypt. The oil shock produced chaos in the West. In the United States, the retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974. The total market return for that period was -12.45%.
Desert Storm (1990-1991) was a conflict between Iraq and a coalition force of approximately 30 nations led by the United States and mandated by the United Nations in order to liberate Kuwait. Services members involved in the conflict: 1.2 million. Casualities are estimated to be between 50,000 to 100,000. The market’s total return for that period (eight months) was 5.50%.
With the exception of the Yom Kippur War and the Oil Crisis of 1973, the periods studied had positive returns. The conclusion we can arrive at, therefore, is that the U.S. market are especially unpredictable during times of crisis. The best thing that we can do as investors is to maintain a fully diversified portfolio that will ride the wave when returns are positive and mitigate losses when market declines occur.
 As measured by the CRSP Market (1-10 deciles) Index