Wars and markets … blood and money

In light of the Russian-Ukrainian crisis, which degenerated into a military conflict. We can talk about various topics of interest to the markets. But looking at the history and statistics of market movements when wars or military attacks break out can be a useful entry point to give a broader perspective rather than being drawn into a herd of emotional responses.

Sayings such as “in crises you make a fortune” and “buy when blood runs in the streets” are clear in the case of wars, and although they are not only exclusive to the financial markets, the statistics of the movement of price markets historically support it. , as we will see later in the attached table.

However, does that mean you buy as soon as you hear a missile launch or read the news of a bomb attack !? Is this an absolute rule that can be adopted !? Is the market recovery the same in every incident?

It is clear that wars, despite their absolute negativity and far from the moral standard, are moving many businesses and sectors, especially the arms sector and the defense industry.

Armament is one of the largest sectors in the world, and some go even further by saying that it is sometimes used to exploit and withdraw the budgets allocated for defense to cover other aspects.

Logically, it can be said that wars affect some sectors, especially the financial and service sectors, and positively on other sectors such as the military sector and companies associated with this sector, from manufacturing companies to contractors and contractors to military transport companies, most of which are listed companies. are in the same financial market, and the growth of their operations will be reflected during the period. Conflicts over their numbers in the future, which is what the trader tries to expect and take advantage of early before the price impact of the market value occurs.

We do not need more research to know that wars cast a shadow over commodities, especially hard commodities and metals such as gold, a safe haven, in addition to the great demand for the energy sector.

The above can fall on others as a kind of crisis, as we have seen from the rise in the technology sector, communications applications and online purchases during the Corona pandemic, while it has negatively affected other retail sectors and the aviation sector, for example.

This confirms the importance of diversifying investments between sectors and stock exchanges when building an investment portfolio, at least to increase the level of hedging.

Returning to the table below to illustrate the movement of the S&P index, which includes the top 500 companies during and after the occurrence of war and political incidents, we see that since World War II, which ended with the end of the Dow Jones Industrial Average increased by more than 50% and by about 7% annually on average, especially after the bottom formed with the bombing of Pearl Harbor in the second part of it, and we note that the impact after the news is positive in the markets as it has made significant breakthroughs after a period of volatility and uncertainty.

repair lower range Regression rate Date the event
307 days 143 days 19.8% 1941 pearl
82 days 23 days 12.9% 1950 North Korea’s invasion of South Korea
18 days 8 days 6.6% 1962 Cuba crisis
1 day 1 day 2.8% 1963 Kennedy assassination
41 days 25 days 2.2% 1964 Gulf of Tonkin incident
57 days 42 days 4.3% 1972 Olympic Games in Munich incident
189 days 71 days 16.9% 1990 Iraqi invasion
31 days 11 days 11.6% 2001 September events
20 days 14 days 2.9% 2004 Madrid bombings
18 days 7 days 1.2% 2017 Syria bombs
41 days 19 days 4% 2019 Aramco bombing facility

The index fell by an average of 5% during the 20 largest events and took less than 50 days to recover from the damage done.

But by examining more in each case, we notice a difference in the pattern of recovery in time, and it is limited to three forms either V represents the price shock and recovery from it at the same speed, then YOU Which indicates a slowdown in the declining movement, then a gradual reversal to the top, and finally the letter L, indicating that a relatively longer stagnation movement is entered before the rise is resumed.

War forecast

The rate of expectation of the occurrence of the war affects the impact on the markets. In the case of pre-war events, the negative decline takes place at that time and begins to rise again, usually during the first days when the actual start of the war, as happened in the case of Russia, Ukraine, and then began to fluctuate due to uncertainty, while the effect varies In the case of a sudden war without concrete introductions.

Regarding the recovery process, several factors influence the formation of the pattern, the most important of which is the location of the event in the economic cycle at that time, interest rates and monetary policy, the size of the event and its distribution, in addition to the psychological receipt of events by the masses of investors and their future estimates of the impact of the event and the speed of its completion, which, of course, affects the operations of Demand and Supply.

This may now be one of the biggest questions, in terms of the repercussions of the Russo-Ukrainian war and how it will affect the Fed’s decisions on interest rates and monetary policy. basis points from 60% to 13%, this is what the market is waiting for, which could currently be a new shock to the markets as an extension of the Russian-Ukrainian conflict.

Answering the previous questions above can be somewhat deceptive. Generally, yes, you can benefit from such opportunities and form a good foundation to build wealth later.

But after studying and researching to determine the appropriate investment instruments at the time of the event, then develop an access plan and without neglecting the return line and the exit plan if necessary.

From a personal point of view, it seems that excluding the adoption of investment decisions based on the news at the time of events is very important, as news channels often exaggerate events either for competitive reasons, views, etc., or because of the agendas and bias of their owners towards certain parties or one of the parties to the conflict.

It is sufficient to consider the price movement and technical models that are more suitable for determining the entry and exit areas as it gives better results for the near perspective, and to use the outputs of the fundamental analysis to identify sectors with stronger financial foundations identify, which often gives a better perception of the longer perspective and the ability of these sectors to return and recover later.

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