There is a saying in the US stock market: "When Wall Street bleeds, it is a good time to start, even if it is you who bleed." ”
Historical statistics show that this stock market quote seems to apply equally to wartime. "Between 1939 and 1945, the Dow rose by about 50 percent, with an average annual increase of more than 7 percent." Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, said, "In fact, in two of the worst wars in modern history, U.S. stocks rose a total of 115 percent." ”
The U.S. Center for Financial Research and Analysis (CFRA), a research consultancy, counts 20 major geopolitical conflicts since the Japanese attack on Pearl Harbor in 1941. The data shows that the average maximum decline of the S&P 500 index is 5%, the average time for the stock index to bottom is 22 days, and the average time for the rebound is 47 days.
U.S. stocks are less and less affected by geopolitical conflicts
In fact, since the 1990s, U.S. stocks have become less and less affected by geopolitical conflicts.
Brokerage LPL Financial counted 16 major geopolitical events, including the Gulf War, the Iraq War and the 9/11 incident, with an average decline of only 2%. In the 3 and 6 months that followed, the Dow was more than 88% likely to close up, with an average gain of 5% and 7.9%, respectively.
The data shows that when a surprise war or conflict breaks out, the stock index reacts more strongly. For example, when the Pearl Harbor attack, the Gulf War, and 9/11 occurred, the S&P 500 fell by 19.8%, 16.9%, and 11.6%, respectively.
Once the conflict breaks out, investors are aware or prepared, the stock index will often "rehearse" the decline, and it is more likely to start a rebound when the conflict officially breaks out.
Ryan Detrick, senior market strategist at LPL Finance, explains: "Stock markets may fluctuate over a period of time, but historically the impact of geopolitical events on stocks has tended to be short-lived. ”
Mark Armbruster, president of Armbruster Capital Management, who counted the period between 1926 and 2013, found that U.S. stock volatility during the period of geopolitical conflict was roughly in line with historical averages, except during the Gulf War.
Ambrost argues that the peculiarity of the Gulf War is that it lasted less than a year, coinciding with a spike in oil prices, leading the economy into a brief recession.
The data shows that during the war that broke out in 1926-2013, both large-cap and small-cap stocks performed well and were less volatile. The only exception was during the Vietnam War, when stock returns were below average but still achieved positive returns.
It is likely to lead to a further increase in inflation
Past experience has shown that after a short knee jump reflex, the overall response of US stocks to geopolitical conflicts is cold, and sometimes even seen as a good time to buy low.
The reason behind this seemingly cold-blooded logic is that, while sometimes the conflict is severe, it does not have a significant impact on U.S. economic fundamentals and corporate profits. For now, Wall Street generally believes that the broader market movements in U.S. stocks are ultimately guided by the Fed's monetary policy and its changes in inflation and overall interest rates.
Wells Fargo economist Nick Bennenbroek believes that the sanctions imposed by Western countries on Russia so far have had a limited impact on the Russian economy and have had less impact on global economic growth. Indeed, even if military conflicts or sanctions push Russia and Ukraine into longer-term recessions, the impact on the global economy will be limited.
In research reports, Bennambrook warned that the increase in inflation caused by the Ukraine crisis could have an indirect impact on the global economy to a greater extent.
"As oil prices rise, inflation is likely to further intensify and household purchasing power may decline, affecting economic activity in some countries and regions, especially the growth prospects of the European Union." Wells Fargo wrote in a research report.
In fact, the Russian-Ukrainian conflict may have become a "new problem" on the road to the Fed's normalization of monetary policy. Geopolitical conflicts have pushed prices of a range of commodities such as energy and grains soar, with Brent crude futures breaking through $100 a barrel for the first time since 2014.
On Friday, the Commerce Department will release its January personal income and spending report, which includes the Fed's preferred inflation indicator, the Core Personal Consumption Expenditure Price (PCE) Index. The market expects the core PCE index to rise 5.1% year-on-year and 0.5% month-on-month in January.
Admittedly, as of now, most Wall Street investors believe that geopolitical conflicts have limited impact on the Fed's monetary decisions, and that rate hikes will "come as promised." However, CME Group's Fed Watch tool shows that investors' probability of a one-time rate hike of 50 basis points at the Fed's monetary policy meeting on March 15-16 has fallen to 17.2%, down 16.5 percentage points from the day before.
Last week, Bruce Kasman, chief economist at JPMorgan Chase, expected the Fed to implement rate hikes in a row over the next nine meetings.
Will there be an epic rally?
As of Wednesday's close, the S&P 500 had fallen about 12 percent from its all-time high on Jan. 3, the first consolidation correction since March 2020.
This is the 33rd pullback experienced by the S&P 500 since 1980. LPL Finance's statistics show that the median correction of the stock index is 16.5%. In the previous 32 consolidation corrections, the probability of the S&P 500 closing up in 1 year and 2 years is as high as 90.3% and 86.7%, respectively, and the average increase is 24.8% and 37.4%, respectively.
Jim Cramer, a prominent American stock commentator, predicted: "Once any of the problems in inflation or the Ukraine crisis are alleviated, the US stock market will usher in an epic rally." ”