We are deeply saddened by the invasion of Ukraine. We have received several enquiries from clients regarding their portfolios and the impact of the situation on their investments. Our Investment team, Dorian and Joanna written an article about conflict events and their effect on the markets.
Our thoughts go out to all the Ukrainian people who are so badly affected at this time.
Benjamin Franklin once coined the immortal phrase “in this world nothing can be said to be certain, except death and taxes.” Whilst this is as true today as it was then, there is another certainty in life; there will be conflict events and flashpoints around the world.
When these events occur, they are often devastating from a personal and humanitarian point of view, however a distinction does need to be made between the humanitarian and the financial impact. Almost inevitably these things can often lead to some short-term uncertainty in financial markets, whilst the direction of travel is being established and the true long-term effects of the conflict event is established. This does not mean that financial markets are irreparably damaged. To date there has not been a conflict event that markets have not recovered from. Perhaps more important to note is that this recovery often does not take long, and in almost all cases comes before the resolution of the conflict.
Unfortunately given the nature of our species, there are far too many conflict events to document since the above quote was uttered back in November 1789, so instead we have looked at notable events that have occurred since the Pearl Harbour attack on 12/7/1941. We have then looked at how far markets fell as a result of the event starting, and then how many days it took for markets to fully recover.
You may be surprised to learn that the average recovery time is only 43 days.
In fact, the longest recovery time was from the Pearl Harbour attack which took 307 days. This means that before the end of 1942 markets had recovered despite us still being in the depths of WWII, and it being almost another 3 years before that conflict was resolved.
The table attached to this article highlights other such notable events as the Cuban Missile Crisis, the Korean War, the Tet Offensive, and the Munich Olympics terrorist attack. It also includes more recent events such as the North Korean Missile Crisis in 2017, the Saudi Aramco drone strike in 2019 and the offensive in Syria.
Whilst the recent invasion of Ukraine by Russian forces seems to be a game changing event, in reality some of this can be attributed to the wall-to-wall coverage that modern media is now able to facilitate and the fact that it is quite close to home. The reality of the situation remains that eventually the market will establish what the winners will be moving forward who will drive the recovery.
A recent correlation can be seen by the events of March 2020, where much of the developed world went into lockdown and markets slumped dramatically. The market falls seen then were among the largest and fastest ever recorded and at the time there was a real sense that this was a “game-changer.” The reality was markedly different.
Months before the vaccine was announced and we began to navigate back to normality, the recovery in financial markets had already begun and had begun rapidly. Markets ascertained that the winners in this situation would be industries and companies that played into the working from home theme and online ordering and the ramp up of deliveries that would be needed. These companies then began to drive markets forward again and by the time the vaccine was announced (which was still over a year before we returned to a semblance of normal life) markets were experiencing one of their biggest growth phases and moves upwards.
Whilst we should always treat every event as individual, we should always be aware of the lessons of history and not overreact to what at the time seems an event that will signal the end times for markets when to date no event has ever proven that to be the case.
Patience remains a virtue and leads us to another vitally crucial point which is how time in the market is much more important than trying to time the market. Whilst the dream is always to buy the market at its lowest point and sell it at its highest, this is a nigh on impossible task (unless you have some illegal insider information and even then, it is only a guide not an exact point and will also land you in trouble with the authorities as an illegal activity!).
Numerous studies over the years have shown that tyring to time when to enter and exit the market always leads to a worse outcome then simply riding out the market downturns so you benefit fully from the upturns.
The afore-mentioned Covid lockdown market fall is a perfect example. Anyone who sold out fearing the worst, missed one of the biggest upturns in history and simply realised losses and then sat on the side-lines watching as the market recovered.
As long-term investors we always look to remain fully invested to ensure that we capture the upturns which have always been greater than the downturns and in a future article we will explore time in the market more fully.
Whilst we didn’t go back further than 1941 when reviewing conflict events, the following quote from the noted financier Nathan Rothschild who in 1810 said “buy to the sound of the cannons, sell to the sound of the trumpets” lends credence to the fact that markets always recover and often recover quickly.