Market performance amid geopolitical crises
INSIGHT ARTICLE |
North Korea. Afghanistan. Syria. With geopolitical crises dominating the news-cycle seemingly daily, we reviewed historical data to gain a better understanding of financial market performance during volatile periods in history. We link these historical observations to our portfolio construction process and discuss key implications.
Market performance in times of conflict. History provides relevant context with respect to market performance in times of conflict. Since 1900, there have been seven major geopolitical crises that have included armed conflict (World War I, World War II, Korean War, Vietnam War, First Gulf, September 11, Second Gulf War). Market performance rose during more periods of conflict than they fell.1
- World War I (1914-1918): The Dow was up more than 40 percent or close to 9 percent annualized.
- World War II (1939-1945): The Dow was up 50 percent or more than 7 percent per year.
- Korean War (summer 1950-1953): The Dow was up nearly 60 percent or approximately 16 percent annualized.
- Vietnam War (March 1965-1973): The Dow was up about 43 percent overall which equates to approximately 5 percent annualized.
- First Gulf War (summer 1990): The Dow dropped 13.3 percent in the three weeks following the inception of the war and finished the year down nearly 20 percent overall. Keep in mind this time period, summer of 1990, also coincided with a recession.
- September 11 (2001): Stocks fell nearly 15 percent in less than two weeks following the attacks on the World Trade Center. Despite the attacks and the recessionary environment brought-on by the bursting of the Tech Bubble, stocks recovered all of the losses within about a two month time period.
- Second Gulf War (March 2003-December 2003): The U.S. invaded Iraq in March, 2003. Stocks rose 2.3 percent the day following the initial invasion and finished 2003 with a gain of more than 30 percent.
We’ve been here before. Perhaps the closest historical comparison to North Korea is the Cuban Missile Crisis. The confrontation between the U.S. and the U.S.S.R. lasted 13 days from October 16 to October 28, 1962. During this period, the Dow was down only -1.2 percen and finished 1962 up nearly 10 percent overall.
We have a plan. Our integrated asset allocation algorithm simulates thousands of outcomes and accounts for possible ‘fat tail’ events. This process helps right-size allocations to riskier asset classes and avoids ‘betting-the-farm’ on any one asset class. The result is a broadly diversified portfolio among 10 – 15 distinct asset classes which tends to reduce overall volatility and hold up better when any one asset class is experiencing a period of stress. Should geopolitical events impact equity markets substantially, fixed income allocations provide a ballast and act as a source of liquidity used to rebalance assets into poorly performing asset classes at more attractive valuations (lower prices).
It is easy to focus on the daily headlines. However, how your portfolio performs relative to your stated investment objectives over time is most important. Sticking to a plan and avoiding emotional reactions to headlines and day-to-day market gyrations remains the best way to ensure long-term investment success.
1Ben Carlson, CFA, “How markets reacted to geopolitical crises”, The Economic Times, 4/13/2017,
Information in this document was prepared by DiMeo Schneider & Associates, L.L.C. and although information in this document has been obtained from sources believed to be reliable, RSM US Wealth Management LLC, DiMeo Schneider & Associates, L.L.C. and their respective affiliates do not guarantee its accuracy, completeness or reliability and are not responsible or liable for any direct, indirect or consequential losses from its use. Any such information may be incomplete or condensed and is subject to change without notice. The Frontier EngineerTM is a registered trademark of DiMeo Schneider & Associates, L.L.C.