Friday, October 13, 2023
How Do Stocks Perform Following Major World Events?
Last Saturday we awoke to horrific reports that Hamas, a Palestinian terrorist group, had launched an attack on Israel, killing over 1,300 Israelis and taking scores of hostages. These victims are in my thoughts and prayers. Psalm 122:6 comes to mind: “Pray for the peace of Jerusalem.”
In response to the attack, Israel launched a counteroffensive on Hamas positions in the Gaza Strip (one of two Palestinian territories, the other being the West Bank), a territory home to 2.3 million Palestinians under Hamas rule. Many of us have been glued to our TV news channels this week. We now have war in the Middle East, war in Ukraine and our House of Representatives is unable to select a Speaker of the House. Despite these looming threats to our well-being, the stock market has held up surprisingly well. As I’ve written repeatedly, the stock market often performs in a manner that makes “expert” predictions look wrong-footed.
For those events that were not paired with recession, the average return for the next 12 months was a healthy 9.2%.
At times like this, it’s helpful to step back and observe what history has to say. Our colleagues at LPL Research have looked at the history of the stock market performance following previous geopolitical events, beginning with World War II. In the chart below, you will see a significant occurrence of both green (positive) and red (negative) numbers, which implies the stock market’s performance following major events would be difficult to predict. LPL Research dug deeper into the data and found that a primary determinant of stock market performance following a major historical event seems to be whether the event coincided with, or caused, a recession. For those events that were not paired with recession, the average return for the next 12 months was a healthy 9.2%. On the other hand, for those events that were paired with a recession, the next 12-month return was -11.5%. This finding begs the question: How likely is an upcoming recession? LPL Research says that a recession is not their base case. Our economy is slowing, but it is still on solid footing. The job market is healthy and the American consumer, which is a key driver of our economy, continues to spend money.
My colleagues and I at Riverfront Capital Strategies strive to be widely read on the markets and economy. We are a bit more concerned than LPL Research about the prospects of avoiding a recession in the next few quarters. Consequently, we continue to lean toward the conservative side in our personal and in our clients’ portfolios. In spite of the geopolitical uncertainties, we resist the temptation to become too negative. We think “staying the course” is the right plan for this situation. We always welcome your questions and comments.
Thank you for your trust.
BRUCE ROBINSON, CFP ®
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
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