History doesn’t repeat itself, but it often rhymes – Mark Twain
The most unpredictable of the 12 zodiac animals, the tiger, has staked its claim on 2022. What looked to be a year of getting back to normal, moving from pandemic to endemic, is now turning into a more tumultuous year than we were hoping for.
Geopolitics has reared its head into global developments with the Russian invasion of Ukraine. This is an ongoing development, so it is uncertain what the overall impact will be, but depending on how it plays out, there could be a notable impact on the global economy. Russia is a major player in the global economy. According to the EIA, Russia is responsible for 11% of the world’s total oil supply. Additionally, Russia and Ukraine together produce just over 25% of the world’s wheat according to the OEC. Depending on the outcome, we could end up seeing a perfect storm of higher energy and food prices. The inflation we had anticipated subsiding by the end of this year could become more prolonged than originally expected.
So how could this impact investors? There are a lot of unpredictable variables at play here, making it hard to get a clear picture, but if we look to the past we can get some clues about the possibilities.
LPL Research made this great chart showing the market impact of many notable geopolitical events going back to WWII. We can see that almost every event had a negative impact on markets, but it is notable that the majority of the time it didn’t turn out to be as bad as we would have thought. In most instances the drawdowns were fairly muted, and the recoveries fairly quick.
Looking at some of the past crises that involved invasions of foreign enemies, we can see that typically markets have declined in anticipation of the invasion occurring, but when it finally does happen, there is a sharp bounce back up. The charts below show the S&P 500 in 5 invasion scenarios.
We have already seen this happen this past week.
But could this lead to something bigger in markets? It’s possible, but the chart below does a good job of illustrating that the most severe and prolonged market corrections occurred alongside recessions. Market corrections without recessions have happened, but they always tended to be less damaging.
While geopolitical developments do play a role in asset returns, it is important to know that there are many other factors that play even larger roles. Historically, the impact of geopolitical events on markets is typically short-lived.
The risk we should keep our eye on now is the onset of a recession, but that’s a post for another day.
