Military Events Do Not Cause Problems for Stocks

It’s interesting to observe what people think causes problems for stock
prices. During 2020, many thought the pandemic would cause stocks to fall.
Then they thought the first global economic shutdown in history would knock

the stuffing out of the stock markets for a long-time to come. True enough,

stock prices went into a free fall for a month after the pandemic began, but still ended
2020 at all-time highs. While negative events can cause problems for stocks in the
very short-term, history has shown there are more important factors that affect the
markets than unexpected military events like wars, attacks or invasions. Lets take
a look at how US stocks have reacted to other military events since the start of
World War II, courtesy of a table from InvesTech.

 

The table below shows how stocks reacted to 13 unexpected military events
since 1940 1 month, 3 months, 6 months and 12 months later. More importantly,
under the title of Bear Mkt on the right side of the table, it shows how the S&P
500 reacted when it was already in a long-term consolidation phase or decline
when there is a Y beside it. If the S&P 500 was in a 16 to 18-year growth cycle,
there is a – under the Bear Mkt heading on the far right side of the table. The
events shaded in brown indicate when the S&P 500 declined for that period. There
is one exception when Iraq invaded Kuwait in 1990, which I will address later.

 

You can see that US stocks fell 6 times out of 13 after three months. There is
only one time when the S&P was down after three months when stocks were not
already in a bear market. That was in 1986 when the S&P 500 was only down
1.5% after three months.

 

The S&P 500 was only down six months later one time when stocks were in a
16 to 18-year growth phase. That was also in 1990 when the S&P 500 was down
only 3.5%. You can see that one year later, the S&P 500 was still up 8.9% after
the 1990 invasion, producing almost exactly the same return as it has in an
average year since the inception of the S&P 500 in 1924.

 

The average return after six months when US stocks were in a 16 to 18-year
growth phase, as we are in now, was 9.26% or 18.52% annualized, not including
dividends. (This includes the 3.5% loss in 1990.) The average gain 12 months
after an unexpected military event during a 16 to 18-year growth phase was
20.38%, not including dividends. This is more than double the average annual
gain of 8% since the inception of the S&P 500, which includes both consolidation
and growth cycles for 16 to 18-year periods.

 

The S&P 500 was already in a bear market and the US economy was in
recession in 1990 due to an inverted yield curve and the Savings and Loans Crisis.
Therefore, the invasion of Kuwait by Iraq did not cause a bear market, but
occurred during a bear market that was already in place. This bear market and
invasion occurred in the middle of the 16 to 18-year growth cycle from 1982 to
2000. History is repeating as Russia is now invading Kuwait in the middle of this
growth cycle from 2014 to 2030 or 2032. Why is this happening again in the
middle of this cycle? We don’t know for certain. Perhaps it is because the
consolidation phase in commodities causes problems in commodity rich countries
like Iraq and Russia, which tempts its leaders to try to improve their own
popularity and their economy by invading another neighbouring country that is
also rich in commodities. Nevertheless, it is uncanny how history repeats the way
it does. We have to accept the fact that there are many things we do not
understand.

 

Don’t get me wrong. Witnessing the suffering, death and destruction during the
invasion of the Ukraine from normal civilians is deeply disturbing! It can create
fear and anxiety about the future. It is an important military and geopolitical
event, which could have many significant repercussions. Some repercussions
could be positive or negative. Only time will tell.

 

However, if people are concerned that what is happening in the Ukraine will
derail US economic growth or the long-term uptrend for US stocks, their views
are out of line with how consumers and investors have reacted to events like this
in the past 80 years. Remember, the situation is always a little different, but, there
is one factor that has not changed in thousands of years, and that is human nature.
Since that is the case, the reaction to events today is usually very similar to how
people have reacted in the past. Consequently, we all have a choice. We can come
to our own conclusions about what might happen in the future based on our
feelings or our own logic. On the other hand, we can look back at how people
have collectively reacted to events like this in the past and accept that as our
guide.

 

We should be concerned about the people in Ukraine and even the Russian
soldiers who may be fighting against their will. History shows we should not be
concerned that this invasion, the pandemic or any other event will derail the trend
of this long-term growth cycle for US stocks and the US economy, which should
still have another eight to ten years to run. In the past, stock prices have only
really declined when a military event took place when they were already in a
downtrend. This shows that they do not cause a downtrend on their own.

 

In the short-term, markets were due for a correction at some point after a 21-
month advance off of the March 2020 Covid lows. There was too much optimism
that had to be removed and the best way to do that is to have a decline that scares
investors. More severe corrections (in the 10% to 20% range) and bear markets
often have two lows six to eight weeks apart that helps optimism to dissipate. This
is the eighth week after the first bottom and key reversal day on January 24th.
After also making two lows, the long-term oscillator for the S&P 500 below
indicates that the worst-case scenario has been factored into current prices and
that a new uptrend has likely started. See the green arrow. Stock prices have

acted much better in the last 10 trading days as well.

The long-term oscillator for the S&P 400 Index of mid-sized companies has
turned up decisively as well. Additional strength early next week could provide
more confirmation that the corrective phase is over and that a new uptrend has
started. I will continue to keep you informed.

SAR Update

Now that Covid restrictions have eased, my SAR team had the annual awards
night on Wednesday. One member received a 10-year award, several received 15-
year awards, one amazing woman on our team received a 25-year volunteer award
and I received a 20-year award.

 

It has been a dream come true for me to be a first responder. I always wanted
to be a policeman, fireman or ambulance attendant when I was very young.
However, as I got older, I just did not want to deal with nightshifts so I pursued
other interests. Joining the Kent Harrison Search and Rescue Team in 2002 was a
way for me to live out that dream as an unpaid professionally trained volunteer.

 

I have been involved in close to 700 search and rescue calls and have attended
close to 800 practice evenings, not including many weekend courses and
re-certifications. I have had the privilege of working together with many like
minded, talented, energetic, caring men and women which has been so rewarding
and enjoyable. It has been fulfilling to help others when we are the last resort they
have left. The variety and type of experiences I have had seems unbelievable.

 

Of course none of us could do what we do without the support of our spouses. I
am grateful for my wife who has had her sleep interrupted many times by the
pager at all hours of the night. Plans for the day or evening have changed in an
instant with no idea when I would be back. There is also concern when we are in a
dangerous environment or situation.

 

I also want to thank you for your support when I have had to cancel calls or
meetings to respond to a call for help. I am also thankful for your interest and the
many comments and responses I have received over the years from the stories I
have included in these Updates. Here is to the next 20 years☺ Have a great
weekend my friend!