War And Markets: Madness But Normal

Reading of the horrors in Ukraine, I thought of Eckhart Tolle’s wise mantra about human folly: “It’s madness but it’s normal.” Indeed, war is madness but it’s all too normal. As a result, we have extensive data on how stock markets react to conflict.

Nothing can shake markets initially like the end of peace. But investors have to remember that, as the New York Times said recently:

“Global markets usually weaken as wars approach, strengthen long before wars end and treat human calamity with breathtaking indifference.”

The initial reaction to wars is panicked selling. But markets had been discounting an invasion of Ukraine long in advance of the February 24 invasion. The S&P 500 had already moved into a correction, down more than 12% from its highs. This occurred as interest rates rose, punishing bonds and bursting numerous bubbles from crypto to meme stocks. The broad market has not declined much since the outbreak of war.

I don’t believe in timing markets, especially based on geopolitical or macro events. It never works. The market’s reaction to Covid proved the point: first down 37%, then up substantially more–all within a matter of months. Most who tried to time those convulsions failed miserably. But that point has been made time and time again, whether in 1932, 2002, 0r 2009.

Markets historically rebound quickly from even the most dire hostilities. As the New York Times explained, one year after the bombing of Pearl Harbor, the S&P 500 was up 15%. One year after the 2003 Iraq invasion, it had risen 35%. As they also point out: “The Cold Warriors who stuck with the stock market ended up with big fat portfolios.”

No one knows what happens next. Will NATO’s Collective Defense Treaty be invoked and World War III commence–all with nuclear arsenals in the wings? Of course, if things go nuclear, we all have much more to worry about than our portfolios. Regardless, the best way for investors to make decisions is with a breathtaking indifference to world events and a decidedly self-centered attention to their own personal time horizon and risk tolerance.

If you want to help the Ukrainian people, contribute money or partner with USAID, but don’t let the conflict influence the long-term thinking in your financial planning.

This terrible time won’t soon be forgotten by history. But it will be forgotten by the stock market. It’s hard to see the distinction now, but it should become clear over time. War—especially this particular war—is the definition of madness. But even this war, like so many before it, is also far too normal.