War, unfortunately, is nothing new for markets

The consequences of war are impossible to ignore.

In only weeks since Russian President Vladimir Putin invaded Ukraine, the military conflict and a tidal wave of coordinated sanctions have washed away the normal structure of our global economy.

Oil prices spiked 40%. American gasoline has surged to all-time highs (well above $4 per gallon). The S&P 500 has fallen nearly 10%. Political tensions continue to escalate. And that’s to say nothing of the humanitarian crisis unfolding in Ukraine and the surrounding countries.

The world has undeniably changed. It’s natural to wonder about worst-case scenarios. And yet in many respects, we’ve been through this before. War, unfortunately, is nothing new for humankind or financial markets.

Ryan Detrick, chief market strategist at LPL Financial, catalogued 37 different crises and major market shocks since the start of World War II. It’s a list long enough to include “Japan Attacks Pearl Harbor” (December 1941), “9/11” (September 2001), “Lehman Brothers Collapse” (September 2008), and a whole lot more.

It is, in other words, a greatest hits of geopolitical and financial disasters. And the U.S. stock market has overcome every one of them. The data suggest that how quickly stocks recover has a lot to do with whether the shock coincides with an economic recession.

In years without a recession, the S&P 500 gained an average of 7% in the six months immediately after the shock. A full year later, stocks were up almost 11%. In recession years, however, the S&P 500 remained 6% lower six months after the shock. Twelve months later, it was down 11.5% on average.

Such a wide disparity in equity performance leads to the natural question: Is the U.S. economy headed for a recession in 2022? The last few weeks are a reminder that anything can happen, but in our view, the odds of a near-term recession remain low.

The U.S. economy grew at an annualized rate of 6.9% in the final three months of last year. Blended earnings for S&P 500 companies rose more than 30% in Q4 2021 and have remained incredibly resilient.

High inflation will certainly eat into true economic growth, but one silver lining from the recent selloff in equities is the Federal Reserve will be more patient with its interest rate hikes. That will be a positive for stocks in the short-term.

Skyrocketing energy prices will raise some eyebrows in the upcoming CPI (Consumer Price Index) prints, but expensive oil and commodity prices are actually disinflationary longer-term because they weaken demand.

It’s also worth a reminder that there’s nothing unusual about a double-digit stock selloff. In the 94 calendar years dating back to 1928, the S&P 500’s median intra-year drawdown is a 13% loss (nearly identical to the S&P’s peak-to-trough loss since early January).

Midterm election years, for what it’s worth, have exhibited even larger intra-year drawdowns (17.1% on average dating back to 1950). The added dose of volatility, however, has not hurt the next year’s returns. The S&P increased more than 32% on average in the 12 months following those midterm intra-year lows.

It’s a familiar lesson that investors who avoid jumping ship will find their way to more prosperous waters, probably sooner than most expect. The last 10 years have been especially smooth for stock investors, but historically speaking, the turbulent start to 2022 bears much in common with other market shocks.

Volatility, we should remember, is the price we pay for long-term growth.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.



Ben Marks & Brett Angel

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