Recent rising tensions between the U.S. and Russia have undoubtedly impacted the financial markets. The S&P 500 is nearing ten percent off its high. As an discussed, we share look at the performance of the S&P 500 after a ten percent correction. Setting aside the human tragedy from these events, should investors sell stocks due to this risk?
Looking at twenty-nine significant geopolitical crises beginning with the Second World War should help answer this question. On average, stocks are higher by three months after a geopolitical shock, and in sixty-six percent of the events, stocks were higher after only one month. The odds that stocks will be higher increases as time passes after the event. In addition, stocks sometimes jump sharply after a crisis, so getting out of the market could have significant opportunity costs. Short-term, there is downside risk from conflicts as stocks fell twenty-six percent in the month after Germany invaded France in 1940.
While on the whole, these geopolitical events have a limited intermediate-term impact, there are times with a more severe spill-over into the economic environment and financial markets. During World War One, the New York Stock Exchange (NYSE) was closed for about four months, and stocks fell by approximately twenty percent once it reopened. In a more recent example included in the analysis, following the 9/11 terrorist attacks, financial markets did not return to operation until September 17, with the S&P 500 falling almost five percent on the day.
Over the long term, stocks reflect earnings, and despite the challenges from higher input costs, fourth-quarter earnings have supported stock prices. Results continue to be well ahead of expectations. 84% of S&P 500 companies have reported results so far, with 77% and 78% exceeding consensus earnings and sales estimates, respectively. The S&P 500 has 54 companies scheduled to report earnings this week.
The U.S. consumer has remained resilient in the face of higher inflation. The retail sales data reported last week was significantly better than expected and helped boost first-quarter economic growth expectations. Notably, this consumer resurgence occurred despite the raging Omnicron infections in January. Overall retail sales rose 3.8% month-over-month while nonstore retail sales, which include online sales, soared by 14.5%. Online sales and a monthly decline in restaurant and bar sales reflect the impact of infections on consumer preference away from in-person. This trend should bode well for continued consumer spending as the pace of infections has already begun to decline precipitously.
In summary, stock declines associated with geopolitical fears have generally been a temporary setback and an opportunity to buy at discounted prices. Investors should be prepared for additional volatility during these periods, though. In addition, investors should retain enough lower-risk assets like cash and high-quality bonds to support living expenses during any of these unexpected disruptions. Six Federal Reserve speakers are on the calendar this week, and investors will be listening closely for hints as to the size of the March hike and the expected total tightening this year. All the fundamental data could again take a back seat to fears regarding the rising tensions between the U.S. and Russia over Ukraine.
Comments