By Robert E. Quittner, Jr. CFP® & CMFC™
Investment Advisor Representative
[email protected]
Last week, I was mulling over some topics to write about today. I have covered investments and the markets in my last few articles, so I was already thinking about shifting to something different. Those thoughts went out the window when I woke up Saturday morning and read that the US and Isreal had begun bombing Iran.
We sent out a brief email to our clients on Tuesday covering this, but I felt it was important to expand further on the kind of effects major global events can have on the markets. When a major geopolitical or economic shock occurs, the first reaction in financial markets is almost always the same: uncertainty leads to volatility. Investors try to quickly price in unknown outcomes, and that often causes the stock market to drop in the short term.
The chart below shows how the S&P 500 reacted to a variety of significant events over the past 80 years. From World War II and the Cuban Missile crisis to the financial crisis of 2008 and the COVID-19 pandemic.
While the initial reaction to these events was often negative, the longer-term results tell a very different story.
In nearly every case, the market experienced a decline during the event itself. Some of those drops were significant. The fall of France in 1940 saw a market decline of 18%, the 1987 crash saw the market drop more than 30%, and the Fall of Lehman Brothers that kicked off the Great Recession saw a drop exceeding 39%.
While those drops are significant, what is more important is how the markets moved forward after the initial shock passed.
Looking out one year, most of these events were followed by strong positive returns. Even more striking are the returns three years out from the event. The market was higher in nearly every case, and many were substantially higher.
For example:
- Three years after the Cuban Missile Crisis, the market was up 46%.
- Three years after the Gulf War ultimatum, it was up 43%.
- Three years after the COVID-19 pandemic began, the market had risen over 50%.
Even events that coincided with major economic downturns eventually recovered. The Lehman Brothers collapse during the financial crisis saw the market down sharply in the short-term, yet three years later the S&P 500 was more than 30% higher.
The Key Lesson
History has shown that the markets are resilient. While unexpected global events can create sharp short-term declines, they rarely change the long-term trajectory of the market which is based on economic growth and corporate profits.
Trying to predict or trade around these events is nearly impossible. In fact, some of the strongest market rebounds occur when uncertainty is still high. Therefore, investors who make rash decisions or get out of the market altogether usually miss the recovery.
You’ve heard us say this many times, but it bears repeating: maintaining a disciplined, diversified investment strategy remains one of the most effective approaches for long-term investors. If there is one message this history reinforces, it is this that the biggest risk during times of uncertainty is often abandoning a long-term plan. Keeping your eye on the end goal and ignoring short-term noise is crucial in times of trouble.
The markets have navigated wars, political crises, terrorist attacks, financial collapses, and global pandemics. And time after time they have continued to move higher as economies innovate, businesses grow, and productivity improves.
While they may react negatively to news in the short run, history suggests that staying invested through periods of uncertainty has been one of the most reliable ways for investors to participate in that long-term growth.
As always, if you would like to check or reevaluate your investment strategy, give us a call or schedule a meeting.
Take care and enjoy the warm weather in the days ahead!
Rob