2-minute read
I was really hoping the Russian-Ukraine war would stand alone for a while, but here we are:
It’s just awful.
Truly is. As the adage goes, “War does not determine who is right — only who is left.”
Our customary finance babble seems quite silly at the moment.
It does. But I would be lying if I said that wasn’t the biggest question clients are asking me.
What are they saying exactly?
They want to know if the war will take down the market and their nest egg with it.
And your response is…?
It might be good for the stock market.
Good for the market?
The S&P was down almost 5% during the month of September. October is still alive, but we’ve seen the damage lessen with a month-to-date return of -1%.[1]
And you think those things are directly linked?
Well, like everything in the market, it’s never that simple. But hear me out.
Go on…
Interest rates have risen sharply over the past two years, especially over the past few months. That’s historically bad for stock returns.
Can you explain that? Finance nerds carry on about interest rates like an awful best man speech. Just let me eat my dry salad in peace.
Let me ask you a question: do you like risk-free investments that offer a return of 5%?[2]
Sure do.
Well, when interest rates rise, that offer becomes a reality. And that reality is easier to stomach than the gyrations of the stock market.
Okay, that makes sense.
And that’s not all. Rising interest rates increase borrowing costs for consumers and companies. You want a mortgage? Say hello to 7%. Company XYZ wants to finance certain firm initiatives? Say hello to higher interest expenses.
Is it a guarantee that interest rates will fall for the duration of the war?
Once again, there are no sure things. But here is what interest rates did in the 12 months following the start of previous wars:
War | Starting 10-Year Treasury Yield | Ending 10-Year Treasury Yield | Net Interest Rate Movement |
Vietnam[3] | 4.23% | 4.96% | 0.76% |
Desert Storm | 8.39% | 8.05% | -0.34% |
War in Afghanistan | 5.50% | 3.62% | -1.88% |
Iraq War | 3.96% | 3.77% | -0.19% |
Russian-Ukraine War | 1.97% | 3.95% | 1.98% |
A mixed bag, I guess.
Certainly. Geopolitics is just one of many factors that affect interest rates. You have to throw in inflation, monetary policy, fiscal policy, economic growth, supply and demand of money, etc.
So I guess we don’t know if interest rates will fall and cause the market to go up.
Here is what we’ve seen from a market perspective. Again, this is year 1 of these conflicts:
War | Market Returns[4] |
Vietnam | 1.63% |
Desert Storm | 10.16% |
War in Afghanistan | -26.09% |
Iraq War | 26.73% |
Russian-Ukraine War | -8.09% |
Are we learning anything right now?
You tell me.
Not really. It just seems like the possibilities are varied.
That’s a good enough lesson for me. Most people assume that wars are definitively bad for the market. I say flush that assumption down the tubes. The market could just as likely rise.
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[1] Source: www.spglobal.com.. -1.15% return from October 1-23, 2023.
[2] Other investments become attractive as well. Think treasury bills, cash, short-term corporate bonds.
[3] Starting date used is the United States first involvement in the war (March 8, 1965).
[4] As measured by the S&P 500. Data from www.spglobal.com