This is How War Affects the Stock Market

Quick Overview

Historically, major geopolitical shocks and wars have resulted in short-term market drawdowns, but the S&P 500 typically recovers or rises over the following 12 months, with the average one-month return being negative 1.3% but the 12-month return averaging a positive 2.1%, suggesting that such events rarely cause sustained market damage unless accompanied by a recession.

Key Points: The average one-month return for the S&P 500 after major geopolitical shocks is negative 1.3%, but the 12-month return averages a positive 2.1%. The worst historical drawdown was following the Pearl Harbor Attack (Dec 7, 1941), resulting in a 19.8% total drawdown, with full recovery taking 307 days. The largest 12-month decline occurred after the Yom Kippur War (Oct 6, 1973), with the market down 43.2% one year later, which coincided with a recession. Geopolitical events rarely cause sustained damage; most events result in short-term volatility, with the market usually recovering within six weeks, except for major conflicts like WWII. If a recession is present during the geopolitical event, the one-month average return is significantly worse at negative 3.8% compared to negative 0.1% when no recession is present. The frequency of major drawdown events (20%+) has decreased over time; three such events occurred in the last six years, compared to only once per decade historically (excluding WWII).

Context: The video analyzes the historical impact of major geopolitical shocks and wars on the U.S. stock market, specifically tracking the S&P 500 Index performance following these events using historical data compiled by LPL Financial. The analysis focuses on immediate one-day drops, total drawdowns, recovery times, and 12-month forward returns, differentiating between periods with and without concurrent recessions to gauge the true market impact of these external shocks.

Detailed Analysis

The speaker examines historical data to determine the stock market's reaction to major geopolitical events, finding that while initial volatility and downside risk exist, the market has historically recovered quickly and often achieved positive long-term returns. Analyzing a table of events, the average one-month return after a shock is negative 1.3%, but the 12-month average return is positive 2.1%. The recovery time varies widely, from just 1 day (Kennedy Assassination) to 307 days (Pearl Harbor Attack). The data further separates performance based on whether a recession was occurring concurrently: if a recession was present, the one-month average return was negative 3.8%, whereas without a recession, it was only negative 0.1%. The worst historical drawdown was 43.2% after the Yom Kippur War (1973), which coincided with a recession. The speaker uses a logarithmic chart spanning from 1928 to 2024 to illustrate the long-term upward trend of the S&P 500, noting that most conflicts cause only temporary dips, with the market continuing its upward trajectory afterward, even though recent events like the Israel-Hamas War (2023) and Russia-Ukraine Conflict (2022) have caused notable dips on the chart. Furthermore, the video points out that the frequency of severe drawdowns (20% or more) has historically been about once a decade, but has increased recently, with three such events in the last six years.