Weekly Market Update with Brian Ransom 25 February 2022
Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
Volatility continues on Wall Street this week. Following the 9.7% pullback in January, the market recovered briefly before continuing on another 6.3% pullback based on news out of Eastern Europe.
Eastern Europe is of course the dominant news item of the week with Vladamir Putin choosing to invade Ukraine, initiating the first major war between two European states since World War 2. Historically, when a major war takes over the news cycle, the markets typically respond negatively and for good reason. Even minor wars can be disruptive to the global economy. However, typically these disruptions to the market are short-lived even as conflicts escalate. Often, the market is fully recovered from the negative news headlines long before the conflict ends. Here are a few examples.
The first Persian Gulf War started in 1990. Peak-to-trough, the market declined 20% over the course of 3 months. However, once it became clear the US was going to get involved, the market quickly reversed and fully recovered within 5 months. In fact, by the time boots even hit the ground in Iraq, the market was fully recovered. The years following the 1990 conflict started a decade long secular bull market run.
The Kosovo Conflict began in 1998 when ultranationalists in Yugoslavia called KLA began escalating tensions. The peak-to-trough decline in this case was 19% and it took only 4 months to recover. In fact, by the time NATO became involved and forced the KLA surrender, the market had not only fully recovered but experienced significant gains.
Ultimately, the lesson here is this: on a long enough time line, the stock market follows earnings. Earnings, shown in red, is the life blood of the value of the stock market shown in blue. When earnings decline, the stock market declines. When earnings rise, the stock market rises. Unless a conflict causes a major disruption to earnings, then I am inclined to believe that any pullback caused by a conflict will be short lived.
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Sources:
1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved February 25, 2022, from FactSet Database.
2.FactSet Research Systems. (n.d.). Dow Jones Industrial Average (Interactive Charts). Retrieved February 25, 2022, from FactSet Database.
3.Encyclopedia Britannica. “Persian Gulf War Timeline.” Retrieved from https://www.britannica.com/list/persian-gulf-war-timeline on February 25, 2022
4.Encyclopedia Britannica. “Kosovo Conflict.” Retrieved from https://www.britannica.com/event/Kosovo-conflict on February 25, 2022
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