Our hearts go out to everyone who is impacted by the conflict between Israel and Hamas. It is an incredibly sad and scary time for so many. Such turmoil as we’ve seen these past few weeks always leave investors questioning what happens next. During this disruptive time in geopolitics, referring to historical context is always helpful when anticipating how war and crisis can impact financial markets.
Adverse geopolitics can influence U.S. economics and market performance but perhaps not to the degree that one would assume. The chart below illustrates the S&P 500 from 1960 to 2023 and identifies various crisis events of many forms. We’ve learned that in most cases the market initially reacts negatively to crises but fully rebounds within a month. Since 1907, the S&P 500 has declined a median of 3% but one month later rebounded a median of 4.7%.
The crises listed incorporate events such as terrorist attacks, environmental tragedies, recessions, and more. Economic growth is generally below average following such crises 12 months later, while the stock market has reflected above average returns in the same time period. We’ve found that the economic cycle at the time has a greater influence on the future growth rather than the crisis event. In looking at the same study, if the events that occurred during recessions were removed from the calculation, the negative effects on future growth are much smaller. To isolate events that most closely resemble the Israel-Hamas war, a war so far without direct U.S. military involvement, would likely be a more focused exercise. The findings are even more supportive of the stock market’s resiliency. The chart below illustrates the S&P 500 in the 12 months prior to and 12 months after 3 similar events, as well as the current war between Israel and Hamas. The bold dark blue line represents the average for each of these events, where the short-term drop is generally recovered quite quickly.
The bond market tells a similar story, with some nuance. In the three cases shown above bond values trended downward on average but were largely influenced by the economic environment and cycle before the event occurred. The yield on a 10-year treasury bond followed a similar pattern to the stock market in prior instances, a short term reaction followed by normalization back to current trend, as seen below.
While the events overseas are tremendously challenging for so many, maintaining a lucid view of how events like this impact one’s finances is vital to making sound investment decisions. The ongoing conflict is very dynamic, and we continue to monitor developments in the Middle East, Ukraine, and elsewhere closely to determine how they may impact clients’ long term financial security.
Please let us know if you have any questions or concerns you would like to discuss.