How will a war affect investments?
As we go to print, armed forces are assembling in the Persian Gulf, the weapons inspectors’ report has been delivered to the UN and the prospects of a peaceful resolution to the Iraqi crisis look slimmer than ever. By the time this material is read, the US could well be at war with Iraq, probably without the UN's approval and certainly against the wishes of most “ordinary” people across the globe.
”Ordinary” people are feeling the affects of these events in numerous ways, none the least of which is widespread financial fallout. Share market values have been adversely affected by a whole raft of events over the last two and half year. Right now, it’s uncertainty about Iraq. So, will a war in Iraq make shares fall further?
Based on the last 90 years, the outbreak of war usually marks a low point for share markets. Those brave enough to buy at that time would have achieved above average returns in each of the cycles surrounding the conflict. Those holding for the long term, before and after a war, were buffeted by the turmoil of the time. That turmoil was temporary like a storm in the middle of an otherwise fine day. Before and after a storm, the weather is typical of the Season. War is like that with regard to the share market.
It’s very important to remember that share markets generally reflect the health of the underlying economy and the profitability of the companies that operate within it. Share markets rise and fall and, over time, they maintain an upward trend. Wars have always caused storms in financial markets. This is an opportune time to recap.
The following text comes from the “The Motley Fool” website and is re-printed with their kind permission.
” WWI
The First World War took everyone by surprise. An act of terrorism quickly snowballed into a war that nobody wanted. Ferdinand's assassination on June 28, 1914, led to stunning war declarations across Europe by Aug. 12.
Given how quickly the world went from relative peace to all-out war, you'd expect the U.S. market to fall. And it did. From a Yale study (S&P numbers are from Jan.-to-Jan.), here's how the S&P Composite Stock Price Index performed:
Year S&P Return
1914 8.37 N/A
1915 7.48 -10%
1916 9.33 +25%
1917 9.57 +3%
1918 7.21 -25%
1919 7.85 +9%
1920 8.83 +12%
In the year after war broke out, the index fell more than 10%. The next year, though, stocks rose to new highs, up 25%. If you'd bought during the bad news early in the war, you saw strong gains. (And these numbers don't include a hefty 5% annual dividend.)
The years following the end of WWI, stocks gained 9% and 12%. Then in the 1920s, of course, the market soared.
WWII
The U.S. stock market declined 17% in the five months following Pearl Harbor, most of it in December. Had you bought soon after the attack -- as the U.S. entered the war -- you would have gained 13% from Jan. 1942 to Jan. 1943, and you would have seen your investment more than double by 1946. Granted, that's largely because the war was won. But again the outbreak of war represented a low point for stocks. (For the record, the U.S. spent more than $2 trillion in current dollars on WWII.)
Year S&P Return
1941 10.55 N/A
1942 8.93 -15%
1943 10.09 +13%
1944 11.85 +17%
1945 13.49 +14%
1946 18.02 +33%
Korean War
The day after North Korea invaded South Korea in 1950, the S&P 500 declined 5.3%. You can see below that this decline in 1950 (not even noticeable in these numbers) was another buying opportunity. The U.S. stock market rose steadily during the war, and it more than doubled in the next five years.
Year S&P Return
1949 15.36 N/A
1950 16.88 +9%
1951 21.21 +26%
1952 24.19 +14%
1953 26.18 +9%
1954 25.46 -3%
1955 35.60 +40%
Vietnam War
The longest war in U.S. history, with combat from 1965 to 1973, was one to which we were slowest to commit. Given that it lasted so long, we're stretching ourselves to tie any stock market moves to it. So we won't. We'll just share the numbers.
Year S&P Return
1964 76.45 N/A
1965 86.12 +13%
1966 93.32 +8%
1967 84.45 -9%
1968 95.04 +13%
1969 102.04 +7%
1970 90.31 -11%
1971 93.49 +4%
1972 103.30 +10%
1973 118.42 +15%
There was a 55% cumulative gain during the war, excluding dividends. You know what happened after the war -- the bear market of 1974. Again, probably not much relation. (Financially, Vietnam cost the U.S. an estimated $110 billion to $150 billion, or over $400 billion adjusted to today.)
Gulf War
Saddam invaded Kuwait in Aug. 1990. The U.S. stock market declined 13% the next three months -- presenting another buying opportunity. The U.S. attacked Iraqi forces on Jan. 15, 1991. By Feb. 13, as victory was apparent, the S&P had gained 16%, and was above its Aug. 1990 level. From Jan. 1991 to Jan. 1992, the market gained 28%.
Year S&P Return
1989 285.41 N/A
1990 339.97 +19%
1991 325.50 -4%
1992 416.08 +28%
The financial cost of Desert Storm was an estimated $60 billion (more than $80 billion today). "
There are very few people who have not been worried by the market conditions of the last two and half years. The past is behind us but, right now, the future doesn’t look that bright either. We are apt, at times like this, to think there is no hope for the future and more of the same will be our lot. Some sage words spoken in 1901 by Charles Dow, journalist and co-founder of the Dow Jones Index may bring some perspective. He said
“There is always a disposition in people’s minds to think that existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance.
When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which makes it unlike its predecessors and gives assurance of permanency.
The one act pertaining to all conditions is that they will change."
We, like you, are watching as the storm begins. We also know that change will come and, in fair weather or foul, we are committed to steering you through.
If you have over NZ$350,000 to invest and want truly impartial advice, contact us to find out how we can put your money to work to fund your important goals.
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