Here’s what happens to stock markets when the world goes to war

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here's what happens to stock markets when the world goes to war Here’s what happens to stock markets when the world goes to war GettyImages 683246422 300x169

History suggests market shocks from geo-political events
typically don’t last, according to AMP chief economist Shane
Oliver.

Escalating tensions between the US and North Korea last week
caused volatility in global markets, although the threat of
conflict appears to have eased for now.

“The risk of war has grown but a diplomatic solution remains most
likely although there could still be more volatility before this
is finally achieved,” Oliver said in a note to clients.

He added a chart to his analysis which shows that North Korea has
become increasingly fond of launching missiles under its current
leader Kim Jong-un.


here's what happens to stock markets when the world goes to war Here’s what happens to stock markets when the world goes to war AMP1 300x169

In looking at the potential implications for investors, Oliver
cited historical examples which show how US stocks have reacted
to major conflicts that America has been involved in since the
second world war.

Oliver focused on the US stocks as the S&P500 has
historically set the direction of other western markets.

Noting that there have been many smaller conflicts in that time,
Oliver narrowed his criteria to major military events which have
had a material effect on markets. Here’s the table:


here's what happens to stock markets when the world goes to war Here’s what happens to stock markets when the world goes to war AMP2 300x169

Looking at recent history, US involvement in Iraq in both 1990
(Iraq War I) and 2003 (Iraq War II) led to a fall in stocks of
more than 10%.

In both cases, market volatility bottomed out well before the end
of the conflict. Oliver adopted a time frame of August 1990 —
January 1991 for Iraq War I, and March — May 2003 for Iraq War
II.

The key takeaways from the historical analysis are that shares
initially fall as markets assess risk, but history suggests that
within six months, they always rise strongly.

Oliver also noted that how stocks were performing prior to the
conflict can also influence how much they fall.

“For example, prior to World War 2, the Cuban Missile Crisis and
the two wars with Iraq, shares had already had bear markets. This
may have limited the size of the falls around the crisis,” Oliver
said.

It’s fair to say that’s not the case now, as market volatility
last week saw US stocks dip from their recent all-time highs.

“The intensification of the risks around North Korea comes at a
time when there is already a risk of a global share market
correction,” Oliver said.

He noted that the S&P500’s climb to new record highs this
year has been driven by just a small number of big companies and
sentiment indicators also reveal a high degree of investor
complacency.

Oliver added that the market’s expectations for the next rate
rise by the US Federal look to be too low.

“However, absent a significant and lengthy military conflict with
North Korea (which is unlikely), we would see any pullback in the
next month or so as just a correction rather than the start of a
bear market.”

“While there is a case for short-term caution, the best approach
for most investors is to look through the noise and look for
opportunities that North Korean risks throw up – particularly if
there is a correction.”

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