The Wall Street Journal reports, ''an escalation of tensions between Russia and Ukraine roiled global markets Monday, but if history is any indication, the declines may be short-lived''.
Stocks have a propensity for getting hit hard immediately following a renewed flare up in geopolitical tensions. Monday has been no different, with the Dow Jones Industrial Average down 226 points, or 1.4%, to 16094. The drop followed sharp declines overseas, with Russian stocks suffering the steepest losses.
The Market Vectors Russia ETF Trust(ticker symbol RSX) dropped 9% to $22.25, on more than three times its average daily trading volume, according to FactSet.
The question now is how much longer will the selloff last. While its still early and there are plenty of unknowns, a look to the past as a guide for potential future performance offers a somewhat calming picture for the U.S. markets.
Sam Stovall, chief equity strategist at S&P Capital IQ, conducted a broad study last year of how U.S. stocks reacted since World War II to anything ranging from wars, near wars, assassinations, assassination attempts, terrorist attacks and financial collapses. In the 14 examples he cited, he found a running theme: Stocks initially sold off, but then didn’t take long to rebound and recover those losses. The chart below, courtesy of S&P Capital IQ, expands upon those examples.
In recent years, three separate examples tell a similar story.
In August 2008, the Russia-Georgia War didn’t have much of a lasting impact on U.S. stocks. The S&P 500 dropped 1.8% on Aug. 7, 2008, the first day of the war. But the market regained those losses the very next day and traded higher for the next month. The major caveat is the war took place barely more than a month before Lehman filed for bankruptcy and Merrill Lynch was sold to Bank of America, moves that ultimately sent the financial crisis to new depths and prompted steep stock-market losses.
The Arab Spring began in December 2010 and ultimately led to the ouster of leaders in Egypt, Libya, Tunisia and Yemen, among others. It didn’t have a profound impact on U.S. stocks. The S&P 500 kept rallying through the end of that year and into February 2011.
And as recently as last summer, Syria’s use of chemical weapons prompted a brief spat of volatility in the markets. The S&P 500 slumped 3.1% in August, but again the decline didn’t last long. The index rallied 3.8% and finished the year up 30% at a record high.
The bottom line about Ukraine and the U.S. markets, at least with regard to information currently available, is any future selloffs could be steep, but they will likely be short-lived.
“Last week major markets ignored the situation based on the assumption that it will be contained,” said David Kotok, president of Cumberland Advisors, which manages about $2 billion in Sarasota, Fla. “The U.S. stock market reached a new high in the midst of the evolution of events. That advance is now in question, and the question may provide an entry opportunity.”
