Military Conflict and the Share Market – Will You Win or Lose?

Financial Planning

Military conflicts are nothing new, however recent tensions between Nth Korea and the USA have heightened fears of a share market shift. We have seen volatility on the back of commentary coming from both sides. This has left investors wondering about the strength of their portfolios and the ability of them to withstand such market movements.  Investors are deliberating over whether to stay in, sell off or even looking for opportunities they can take advantage of.  A recent article by Shane Oliver (Economist) explores these questions, reflectively looking back at previous conflicts in share market history.

It should be noted that not all military conflicts have long term financial markets impact.  Many conflicts, a recent example of which would be the Afghanistan conflict had very little economic impact, when compared to the IRAQ conflicts, which of course threatened world oil reserves.

In his article, Shane Oliver, provides an insight into what we may expect.  Mr Oliver gathered data from the US share market and isolated those periods before and upto 12 months after a major conflict.  The conflicts selected were: WW2 (1939-1945), Korean War (1950- 1953), Vietnam War (1955-1975), Cuban Missile Crisis (1962), Iraq War 1 (1990-1991) and Iraq War 2 (2003).

Note: Mr Oliver only analyses the impact of the conflicts on the US share market only.

Table 1.

Event Associated fall Market Low v Resolution Six months after Market Low 12 Months after Market Low
WW2 -34% + 34 mths + 25% +54%
Korean War -8% + 36 mths + 29% +31%
Vietnam War NA NA NA NA
Cuban Missile Crisis -7% + 5 days + 30% +36%
Iraq War I -11% + 19 days +21% +34%
Iraq War II -14% + 51 days +27% +38%

 

Lets look a little closer at what the data tells us.

WW2: Shares fell 34% from the outbreak and bottomed in April 1942, almost 3 years prior to the end of conflict.  Within six months of the low they had bounced back 25%, within 12 months they were up 54% and by the end of the conflict were up 108%.

Korean War: Shares fell 8% initially, within a recessionary environment.  Share prices bottomed out approx. 3 years before the conflict ended and showed upward trending characteristics throughout the majority of the conflict. Finishing up 31%, 12 months after the low.

Vietnam War: During the 20 year period, the US market was predominantly a bull market with brief bearish periods mainly resulting from other issues. Rising inflation and a country disillusioned with the conflict no doubt contributed to the end of the bull market, but it could be argued that the war played a small role. No data provided in original report.

Cuban Missile Crisis: Shares fell initially approx. 7% in 8 days, bottoming 5 days before resolution and bouncing back quickly, finishing up 35%, 12mths later.

Iraq War 1: Shares fell initially 11% when Iraq invaded Kuwait. Shares bottomed 8 days before the US troops hit the ground which was 19 days before the conflict ended and then rose sharply to finish up 34%, 12 months later.

Iraq War 2: Shares again fell 14% initially bottoming out before the first missiles landed.  Again share prices rose substantially through the conflict finishing up 38%, up within 12 months.

What does the market history tell us?

  • Initial uncertainty results in share prices falling, hitting the bottom well before the conflict ends.
  • Apparent or perceived resolution either militarily of diplomatically provides the catalyst for market increases.
  • The first 6 months after a low shows strong growth and
  • Bear markets prior to conflict have limited the falls, however the bounce back has been consistent regardless of incoming market conditions.

Shane Oliver suggests 4 possible scenarios investors need to be aware of.

De- escalation – some volatility, but no great impact on markets long term

Diplomatic solution – continued drawn out diplomacy resulting in 5-10% correction in market with a bounce back once resolution is found. – (Cuban missile crisis)

Brief conflict – reflective of both IRAQ conflicts with falls based on nervousness but rebounds prior to actual military action.

Significant military conflict – Assuming a non nuclear conflict, a sustained military action would result in Sth Korea and Japan taking serious losses, impacting global markets by approx. 20%.

Conclusion.

History teaches us that share markets have survived military conflicts in the past and assuming this current event to be a ‘non-nuclear’ conflict, will survive them moving forward.  Investors should consider riding out the initial falls caused by the uncertainty and nervousness.  Whilst exercising caution in the short term, investors should look for opportunity hidden within the uncertainty.  Opportunity can exist in many sectors, some of which may include currencies, manufacturing, technology and logistics. This is even more pertinent when we look at the corrections that have occurred in the past.

To speak to one of our advisors about your share market options, call CXC Financial Partners on 1300 925 081

About the Author:

Tim HobartTim Hobart is Managing Director of CXC Financial Partners. Located at our Sydney office Tim has a Bachelor of Commerce, a Graduate Diploma in Financial Planning and is a Certified Financial Planner (CFP). With over 15 years’ experience providing Accounting, Taxation and Financial Planning services, Tim has grown a reputation as an Adviser and Business Owner with uncompromising standards, focussed on delivering an exceptional experience for his valued clients.

Tim Hobart can be contacted on 1300 925 081 or by email on tim.hobart@cxcfp.com.au

All contents presented within this document are not to be construed as personal financial advice, taxation advice, a recommendation or an offer or invitation to buy, sell or hold a financial product. It is for general informational purposes only. While every attempt has been made to ensure the accuracy of this information at the time of compilation, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by CXC FP, its officers, employees, agents or authorised representatives. Investing in financial products comes with inherit risk and it may not be right for you. Talk to a CXCFP adviser to see how we can help you.

Oct, 04, 2017

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