Conflict and Portfolio

An overwhelming majority of retail investors tend to agree that the world's conflicts are unpalatable and detrimental to their portfolio of stocks, that's according to 86 percent of people polled recently. So they would almost all be nodding in agreement that the world's biggest skirmishes, for example the Ukrainian situation reaching boiling point with NATO warning of a Russian invasion, Iraq's ongoing civil war threatening to split the country in two, the Syrian civil war, the ongoing Palestinian Israeli conflict and the ongoing war on terrorism is about to wreak mayhem on their share portfolios.

Perhaps that's a fairly predictable poll result and a normal reaction to the effects of war on a portfolio, after all war is terrible and tragic.

However, with respect to having a detrimental impact on your investments, surprisingly this is not how some legendary professional investors view it. Baron de Rothschild once famously, or callously said depending on how you view it, "The time to buy is when there is blood in the streets."

Apparently, if we look back in history to a number of previous conflicts and its impact on stocks we can deduce that despite war being an awful prospect it didn't actually knock stocks off their bullish trajectory. There are a number of reasons why this might be so. The current conflicts seem to be relatively short in duration and confined to small areas of the world to have any significant impact on the global economy and corporate earnings. Obliviously, there are exceptions to this, particularly when the localised conflict involves a strategic region, for example fighting in the Persian gulf could have an impaction on the supply of oil and its price. Skirmishes in the world's most important shipping routes, such as the Panama canal might cause frightened ships to divert their passage to safer but longer routes, this would increase transportation costs. Conflicts in areas containing logistically important gas or oil pipelines supplying other major regions, such as the Ukraine could also result in cuts or disruptions to supplies, which would raise energy costs in Europe.

So with the exception of fighting breaking out in “logistic" or strategic regions of the globe, it would usually take a massive global war to send stocks crashing. Modern market history suggests that even recent skirmishes involving major powers like America and Britain – have not had a significant global economic impact. While the current conflicts raging today are disastrous for those unfortunately involved they are probably unlikely to have any real significant impact on the global economy and corporate earnings.

Take for example the Korean war. The S&P 500, a compressive index with the longest historical data available, initially stocks experienced a rapid sell off, falling by 14% between 12 June 1950, just 14 days before the war began, and 17 July 1950. But just two months later stocks had recovered their losses and were back in the black. Over the entire conflict, from 25 June 1950 through 27 July 1953, the S&P entered a strong secular bull market rising over 25 percent during this period.

Even at the height of the cold war period during 1962's Cuban Missile crisis with Khrushchev's decision to put missiles in Cuba, which brought America just a footstep away from a nuclear war with Russia, didn't have a significant impact on stocks. However, the S&P 500 followed a predictable trend of falling initially on the outbreak of the news that the Americans discovered Soviet missiles on the Caribbean Island off the cost of Mexico. Stocks hit support levels, a market bottom, on 23 October, 1962 one day after President Kennedy announced the naval blockade. Markets rose the next day, when Soviet Premier Nikita Khrushchev called the blockade an "act of aggression" and told his ships to ignore the blockade and push on. During this tense period the stock market held firm, there were no sharp sell-offs while the Soviets tested American grit to enforce the blockade. When the Soviet ships turned around on 5 November, that year the S&P rallied up 9% off the October lows low and a secular bull market ran strong from there onwards for more than three years.

With respect to the Middle East, stocks fell in the run-up to the Six Day War among Israel, Syria and Jordan, during June 5 1964 and June 10, but the S&P 500 rose during every trading session once war began.

Most recently in the middle east with the Iraq war Markets fell before both official Iraq Wars - 1991 and 2003 - but soon reversed and finished strongly positive both years. Global markets rose 22.1% in 1991 and 19.7% in 2003 (both in Sterling).

What about the recent war in Europe in the mid-1990s; the Bosnian War? The trend is to repeat yet again. Stock Markets were volatile in 1994 as conflict started to boil, but world stocks bottomed in late January 1995, shortly after NATO air strikes began in Croatia. Stocks gained even as fighting lasted through 1995, despite the past atrocities like the Srebrenica Massacre. From the 24 January low market point through year-end, world stocks gained 23.7%.

So there's enough evidence from history to support the view that on the eve of war the stock markets trends experience a selloff and fall, perhaps this is due to investors overreacting to the event. Then for some reason afterwards, on the sounds of gunfire, the market bottoms out and enters a new cyclical bull cycle, running for three plus years.

There's only one event in history that breaks this trend; Hitler’s invasion of Poland that triggered off WWII, markets remained depressed for years.

Unless you believe we are on the eve of WWIII, which is hopefully unlikely, then the Ukrainian crisis might represent buying opportunities for investors.