To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing up 1.3%; the U.S. Dow Jones Index finishing down 1.0%; and the U.S. S&P 500 finishing down 1.8%.
While the ongoing narrative of inflation and rising interest rates continues unabated, there is another news topic that has been simmering for months and appears to be coming to full boil – the possibility of a Russian invasion of Ukraine. I’d like to offer some thoughts…
First, I will put forth that, to date, I have purposely avoided addressing this topic in these weekly updates. Not because it's unimportant to the world at large, but because the sustained impact of geopolitical events on the markets is clear – there isn’t one. Given this historical record, it seemed counterproductive to dwell on the prospect of conflict in Ukraine when the likelihood of a sustained negative impact on client portfolios is negligible. However, the prospect of an imminent invasion has materially ramped up in recent hours and clients are sure to see – and likely be concerned – by the implications for their portfolios So, this said, let’s look at the historical record in a bit more detail.
Since – and including – the bombing of Pearl Harbor, RBC has identified 21 geopolitical shocks to the stock market. These include: the aforementioned Pearl Harbor attack; the Korean War; the Suez Crisis; the Cuban Missile Crisis; the Vietnam War; Gulf Wars 1 and 2; the 2011 terrorist attacks; and several other similarly disturbing events. On average, the day hostilities begin, markets have finished down 1.2% (the Korean War resulted in the worst 1 day loss of -5.4%). Further, on average, it took 22 days for markets to reach the ultimate average low of – 5.0%, with only four events (Pearl Harbor, the Korean War, Iraq’s invasion of Kuwait and the 2001 terrorist attacks) seeing peak to trough losses of more than 10%. But interestingly, from the day hostilities begin, it took markets on average just 47 days to recover all losses before moving on to new highs.
And the preceding assumes conflict will actually break out in Ukraine. I will admit that it sure appears likely, but it is not certain and diplomacy met yet win the day. It’s also possible that this may all be a bluff by Russia (pushing oil prices, a key Russian export, higher as long as the threat of conflict persist). In any event, were a client to take defensive measures in the face of an anticipated event that doesn’t happen, well, that typically doesn’t work out very well. And if the event does happen and war breaks out, the historical record reveals there is little, if any, lasting impact to the markets.
I’ll conclude by quoting an internal RBC memo:
Takeaway: Ultimately, markets tend to shrug off instances of geopolitical stress, and the reactions tend to present themselves as short-lived periods of volatility rather than any sort of outright trend reversal; therefore, key equity drivers such as corporate profit growth and prevailing macro-economic trends should continue to be the factors that drive multi-asset portfolio strategy.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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