47 days later: how markets recover from war and conflict

Geopolitical conflicts are traditionally perceived by investors as a signal to protect themselves and reduce risk: they sell stocks and flee to safer assets. However, historical data shows that stock markets fall quickly - and, as a rule, recover their losses just as quickly. Analysts at Raymond James and Morgan Stanley came to these conclusions after analyzing the stock market in retrospect;

Raymond James Bank, after analyzing reactions to major geopolitical crises, concluded that on average the market pulls back 14% and recovers to previous peaks in 47 days. «Geopolitical shocks provoke quick bursts of volatility followed by equally quick recoveries,» said Brienne Gardner, asset manager and investment adviser at Velocity Investment Partners, Raymond James, on BNN Bloomberg.

Morgan Stanley analysts examined market behavior during the 20 conflicts and also concluded that the market is recovering, albeit not always linearly. Here's the data they cite in a report released this week:

 -in November 1979, when U.S. diplomats were taken hostage in Iran, the S&P 500 index sagged 0.6 percent in a day, but rose 5.4 percent a month later and nearly 27 percent a year later;

- on the day the Gulf War began in August 1990, U.S. stocks fell 1.9%, and a month later were down 8.1%. But a year later, they were up 10%;

- The outbreak of war in Kosovo in 1998 triggered a 0.4% decline in the S&P 500 index, but a month later it was up 5.8%, and 12 months later it was up 18%.

Morgan Stanley's retrospective analysis shows that sometimes the market lacks a year to recover. Among such examples are the Suez crisis in 1956 (12 months after the beginning of the conflict the market remained in minus by 12.9%), the Arab-Israeli war in 1973 (-41.1%), the Afghan campaign in 2001 (-26.1%). But this is an exception rather than a rule, analysts believe;

Although markets historically always recover from conflict, investors continue to react to crises with anxiety. «When the headlines are scary, people start to think they have to do something about it,» says investment consultant Raymond James. Here's what she advises in such cases:

1. Don't panic because of frightening news stories

Gardner believes that the most important thing in crisis situations is to remain cool-headed. Often people change their strategy because of emotional reactions to news. Gardner believes that investors should not rush into decisions, but should remain calm and disciplined.

2. Adhere to a long-term strategy

«It's one thing to be in the market, it's another to try to catch the moment,» Gardner reminds us. Even professional managers avoid abrupt changes in their portfolios and bet on long-term investments. 

3. Don't give up on short-term investment opportunities, but not at the expense of long-term plans 

Gardner notes that during military conflicts, managers may make tactical bets on certain sectors: defense, energy and industrial sectors. «That doesn't mean such stocks will be leaders over the long term. But in the moment, they may show better momentum.» 

4. Diversify the portfolio - by asset, industry and region.

«It's a key principle,» Gardner believes. Diversification reduces a portfolio's sensitivity to shocks and helps smooth out volatility - especially if the balance is maintained not only in stocks and bonds, but also in the choice of sectors and countries. 

5. Use protective assets.

With a weak dollar and high geopolitical uncertainty, defensive assets can keep a portfolio stable, Gardner says. She herself uses gold as such an instrument: the current strategy increases the share of this precious metal in portfolios managed by her team to 4%, which is twice as much as usual;

This article was AI-translated and verified by a human editor