Should You Be Worried? Geopolitical Shocks & Historical Trends in the Stock Market [Video]

Does history repeat itself in the stock market? What's happened in the past doesn't necessarily reflect what's going to happen in the future, but it does give us a barometer and a reason not to panic. Let’s look at some historical trends of major geopolitical shocks and the US market returns after those shocks.

Historical Geopolitical Shocks

The worst-hit on our national economy was on December 7th, 1941. When Pearl Harbor was hit in World War II the stock market dropped to negative 4.15%. The maximum drawdown was 20.34%. But for the year, the stock market was up 3.7%.

In 1967, during the six-day war in Israel, the first-day drop and maximum drawdown was 1.64%. For the year the market was up 19.36%.

In 1990, during Iraq's invasion of Kuwait, the first-day drop was 1.9%. The maximum drawdown was at 17.47%. But for the year, the market was up 13.66%.

In 2013, after the Boston Marathon bombing, the market was down 2.48%. It only dropped a little over 3%, but the one-year return was 19.49%.

For more historical examples and details on this subject, check out War Times & The Stock Market resource from First Trust here.

US Stock Market Returns After Major Geopolitical Shocks-First Trust-2

Past performance is no guarantee of future results. Source: First Trust


Ken French Data Library. Ken French data library uses the CRSP database. Universe includes all New York Stock Exchange (NYSE), American Stock Exchange (AMEX) & NASDAQ stocks. Returns are market-cap weighted. *2/24/2022 data is from Bloomberg and represented by the S&P 500 Index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. An investor cannot invest directly in an index.

The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.

 

Fast forward to 2022

There are a lot of geopolitical shocks going on right now. COVID's been going on for a couple of years, and we've adjusted to that for the most part, but now we’re faced with the war in Ukraine. Instinctively, many of us think, “I'm getting out of this stock market, because who knows what's next?

Despite COVID, the war in Ukraine, and other nasty politics, this economy still has some things going for it that could help it grow. Let’s look at something called megatrends.

 

Megatrends

A megatrend is a major movement, pattern or trend emerging in the macroenvironment. Megatrends help overcome the day-to-day events, help our collective productivity, and increase our knowledge at an exponential rate.

A book published in the 1970s titled Future Shock, by Alvin Toffler, predicted that knowledge would be growing geometrically, and the prediction was correct.

We’ve seen vaccines developed quicker than ever before. There are cures for certain types of cancer.

A new car company has even come out with an electric car that gets over 500 miles in one charge. MotorTrend took the car for a test drive because they didn’t believe it – the car went 530 miles, and still had a little bit of juice left!

That's a geometric progression and it’s happening in every industry.

 

Make Sure You’re Properly Invested

It comes down to this: if you have so much of your money in the stock market that you're worried about a geopolitical shock, you’re overinvested. Regardless of how the stock market is doing, your priority is to be able to pay your bills and take care of your personal economics. Money in the stock market should be left there to grow for a minimum of five years. Anything else should probably be properly allocated in protected instruments of some type.

The world is getting more and more efficient. Knowledge is creating wealth all over the world and that's going to continue as wealth builds and the stock market continues to grow. If you're properly allocated there's no reason to panic.

If you’re not sure where you stand financially, please contact us today!

 

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Investing involves risks and there is no guarantee that any particular strategy will work under all market conditions or protect against loss in a declining market. Diversification and asset allocation may reduce some risks of investing, but do not guarantee a profit or ensure against a loss in a declining market, they are methods used to manage risk.

 

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