Content provided by Kostya Etus, CFA, Portfolio Manager
Mr. Market may give a nod to a geopolitical crisis but is really more concerned with economic strength and corporate profitability. While a crisis may weigh on the economy, it is typically not the case.
There have been a lot of headlines recently about North Korea, Venezuela, Charlottesville, and other hotbeds that could result in crisis-type situations — should investors be worried?
Ned Davis Research has compiled a list of 53 historic crisis events (listed below). It evaluated U.S. market performance during the crisis reaction dates as well as performance during subsequent time periods.
As expected, investor emotions (fear) resulted in a negative 6.6% average return during the crisis; but over the following one-month, three-month, six-month, and one-year periods, the returns were positive. The loss of the initial reaction netted out by about the six-month mark, and the market returned a staggeringly positive 14.2% average return over the year following a crisis.
One way to help prepare for the future is to learn from history. Let’s take a closer look at some specific events:
- Political Crises – On the list we have the Eisenhower Heart Attack, JFK Assassinated, and Nixon Resigns. Averaging those three events you get a -9% reaction drop, with a positive 13% return six months out and a 19% return a year out.
- Nuclear Threat – There may have been several close calls during the Cold War, but the main one that comes to mind is the Cuban Missile Crisis. The reaction to the event was not even a market drop, but one year after, the U.S. market was up a stunning 30%.
- Terrorist Attacks – Focusing on those within the U.S. we have the Boston Marathon and Oklahoma City Bombings, as well as the two World Trade Center Attacks. Average reaction drop is just under 4%, and one year out an average 12% upside.
One lesson learned here is that the market typically goes up over the long term. Thus, staying invested and diversified leads to a better investor experience and higher chance to achieve retirement goals.
Additionally, as Warren Buffett likes to say, it is wise to be “fearful when others are greedy and greedy when others are fearful.” CLS likes to take advantage of what the market provides instead of trying to predict the next crisis. If a crisis does develop, we will use it to our advantage to buy assets at a discount.
(Click to Enlarge)