Monday Market Update – February 21

Forefront‘s Monday Market Update

The stock market’s relationship with war

For my entire career I have heard that investors and markets hate nothing more than uncertainty. I can’t think of a more uncertain situation than a military conflict or war, and market prognosticators are not going to waste a second before they get on TV and predict disaster.

When you look back at the history of military conflicts and the stock market, during and immediately after those times, the facts tell a very different story.

Early Conflicts 

In 1914 after the start of the first World War the Dow fell by 30%. Not surprising seeing as how the war effectively stopped the business world in its tracks and liquidity inside of the market was like finding water in the desert.

At that time, the stock market was closed for 6 months, the longest period of time the stock market has ever been shut down. In 1915 markets were up 88% and from 1914 – 1918 the Dow was up 40+% for an annual return of nearly 9%. This is with the markets shut down for 6 months of 1914.

World War 2 was also quite similar. From 1939 when the war started until the end in late 1945, the Dow was up cumulatively 50%. This was an average gain of 7% per year.

When Hitler invaded Poland on September 1, 1939, the stock markets reaction upon its opening on September 5th, was to shoot up nearly 10%.

In December 1941 after the attacks on Pearl Harbor, stocks opened the following Monday down just under 3%, but those losses were made up for within a month.

One would think that D-day would have a massive impact on the markets, but on June 6th, 1944 the stock market barely even registered anything was going on, and was up 5% over the coming month.

Recent Conflicts

In the Summer of 1950, North Korea invaded South Korea creating a conflict that would last into the summer of 1953. In that period of time, the Dow was up just shy of 60%, or 16% annualized.

When US troops entered Vietnam in March of 1965 it created a social ripple through society, but the Dow would finish the year up nearly 10%. When the last US troops came home in 1973, markets had gone up by 40+% over those 8 years.

September 11th, 2001 was a day none of us will ever forget, and the US stock market was already in the midst of a recession from the dot-com bubble bursting. Stocks fell nearly 15% in the two weeks following the 9/11 terrorist attacks. Within a couple of months, the stock market had regained all the losses suffered due to the 9/11 terrorist attacks.

When the US invaded Iraq in March of 2003, the market rose 2.3% the next day, and ended the year up more than 30%. Granted we were coming out of a brutal bear market from 2000-2002.

What the facts don’t tell you

Statistics and facts really do help to give you perspective, but what the facts don’t tell you is what was happening in between point A and point B.

The answer is a whole lot of volatility, uncertainly, and talking heads/prognosticators predicting doom, gloom, and depressions.

The investors who reaped the most benefits were those who kept a level head and stayed the course of their plan. These investors didn’t just reap the best economic benefits, but the best psychological benefits as well because they did not let themselves get pulled into the narrative that would swing their emotions.

Russia and Ukraine

I don’t want you to think I am minimizing the current conflict we are watching unfold between Russia and Ukraine, and I don’t know what the market will do if there is more of a military conflict rather than diplomatic conflict.

We are monitoring the situation closely and always stand at the ready to adjust and make changes, if necessary, but what we will not do is make changes because of emotions.

As we continue to be bombarded by talks of war, inflation, and rising interest rates, we have seemingly glossed over the absolutely stellar corporate earnings that have come out thus far, as well as the fact that even with higher inflation, the US consumer continues to spend.

During times of uncertainty, I like to go back and remember that stock prices are a function of earnings and fundamentals.

Let’s tune out the noise and focus on what really drive stock prices higher.

So What?

So how does this impact all of you?

  • Let’s tune out the noise and focus on what really drive stock prices higher. Earnings and Fundamentals!

Stock market calendar this week:

Presidents Day holiday – None scheduled
9:00 AM S&P Case-Shiller home price index (year-over-year change)
9:00 AM FHFA home price index (year-over-year change)
9:45 AM Markit manufacturing PMI (flash)
9:45 AM Markit services PMI (flash)
10:00 AM Consumer confidence index
None scheduled
8:30 AM Initial jobless claims
8:30 AM Continuing jobless claims
8:30 AM Gross domestic product revision (SAAR)
8:30 AM Gross domestic income (SAAR)
10:00 AM New home sales
8:30 AM Nominal personal income
8:30 AM Nominal consumer spending
8:30 AM PCE inflation (monthly)
8:30 AM Core inflation (monthly)
8:30 AM PCE inflation (year-over-year)
8:30 AM Real disposable income
8:30 AM Real consumer spending
10:00 AM UMich consumer sentiment (final)
10:00 AM 5-year inflation expectations (final)
10:00 AM Pending home sales

Most anticipated earnings for this week: