Time to Read: 5 minutes

General Qassem Soleimani, head of Iran’s elite military force and one of the most powerful figures in the Islamic Republic, was killed by an airstrike in Baghdad on Friday, January 3rd, 2020. The Trump administration ordered the airstrike to deter “imminent and sinister attacks on American diplomats and military personnel.” General Soleimani was viewed by many as the second-most powerful person in Iran behind Supreme Leader Ayatollah Ali Khamenei, who has vowed “harsh retaliation” for the killing.

Crisis events and market reactions: A historical perspective

Amid escalating tensions—which may or may not turn into a direct confrontation between the U.S. and Iran—many investors are wondering how stocks will react. Will events evolve into a full-blown crisis and possibly bring an end to the long-running bull market? While it is far too early to judge the scope of fallout, we find it worthwhile to consider a historical perspective. Crisis events happen all the time and the stock market often reacts immediately. Since crisis events are typically unexpected, investors are largely unable to prepare themselves, outside of adhering to fundamental asset allocation principles. Once the dust settles, however, investors can decide to act.

The chart below, courtesy of Ned Davis Research (NDR), marks crisis events since 1960 and investor reactions in the form of daily levels of the S&P 500 Index. In terms of which events affected the stock market over the long-term and which did not, we see no clear pattern.

Looking back even further, NDR has identified more than 50 crisis events since 1900 and analyzed their impact on the Dow Jones Industrial Average, as shown in the table at the end of the article. While some geopolitical escalations and outright wars did have long-term consequences, others did not.

In our personal review of the events, we observe that the crises with the greatest long-term impact on the market have been those which ultimately affected the U.S. or global economy in a meaningful way. For example, 126 days after the collapse of Lehman Brothers in 2008—synonymous with the start of the global financial crisis—the Dow Jones had declined 32.3%. On the other hand, 126 days after the Iranian hostage crisis of 1979, the Dow Jones was down just 0.3%.

Looking ahead: A possible entry point to increase equity exposure

As we will report in our upcoming 2020 Outlook, we believe the global economy has been showing signs of improvement (up until this event) and we have been looking to increase our exposure to equities to get in line with this fundamental improvement. The one factor that has kept us on the sidelines has been excessive optimism, which is usually a contrarian indicator for short-term performance. Perhaps the current escalation in tensions will curtail such optimism, offering us a better entry point for a potential allocation change.

We will continue to monitor events in the Middle East for the possibility of disruption to the global economy. For now, we remain slightly underweight equities as we begin 2020.

 

 

DJIA % Gain/Loss Days After
Event Event Date 22 Days 63 Days 126 Days
Panic of 1907 10/21/1907 ‐9.6 5.3 14.7
Exchange Closed WWI 12/12/1914 8.1 5.5 20.4
Woodrow Wilson Stroke 09/26/1919 9.6 ‐2.1 ‐15.0
Bombing at JP Morgan Office 09/16/1920 ‐4.3 ‐12.9 ‐12.2
Market Crash of 1929 10/29/1929 ‐4.2 ‐4.0 10.6
Germany invades France 05/10/1940 ‐23.6 ‐17.9 ‐9.9
Pearl Harbor 12/07/1941 ‐2.4 ‐9.6 ‐16.0
Truman Upset Victory 11/02/1948 ‐9.8 ‐4.6 ‐6.7
Korean War 06/25/1950 ‐8.9 1.0 2.2
Eisenhower Heart Attack 09/24/1955 ‐6.0 ‐0.2 5.1
Suez Canal Crisis 10/31/1956 ‐1.2 ‐1.9 2.3
Sputnik 10/04/1957 ‐6.8 ‐5.0 ‐5.4
Cuban Missile Crisis 10/21/1962 11.2 17.8 24.7
JFK Assassinated 11/22/1963 3.8 8.7 12.0
Martin Luther King Assassinated 04/04/1968 5.8 6.1 9.6
U.S. Bombs Cambodia 04/30/1970 ‐5.0 ‐0.8 2.6
Kent State Shootings 05/04/1970 ‐3.3 0.1 3.0
Penn Central Bankruptcy 06/21/1970 0.6 5.3 14.1
Arab Oil Embargo 10/17/1973 ‐9.6 ‐11.5 ‐10.3
Nixon Resigns 08/08/1974 ‐16.9 ‐15.4 ‐10.0
Iranian Hostage Crisis 11/04/1979 1.2 6.9 ‐0.3
U.S.S.R. Invades Afghanistan 12/26/1979 4.4 ‐8.5 4.5
Hunt Silver Crash 03/27/1980 5.7 16.5 26.6
Falkland Islands War 04/02/1982 2.5 ‐3.6 7.6
Beirut Bombing 10/23/1983 2.2 ‐0.4 ‐8.0
U.S. Invades Grenada 10/25/1983 2.1 ‐0.5 ‐6.9
Continental Illinois Bailout 05/09/1984 ‐3.8 2.4 4.5
U.S. Bombs Libya 04/15/1986 0.2 ‐0.7 ‐0.7
Financial Panic ’87 10/19/1987 ‐14.4 ‐12.6 ‐10.6
Invasion of Panama 12/20/1989 ‐3.5 1.2 7.4
Iraq Invades Kuwait 08/02/1990 ‐9.8 ‐15.6 ‐6.4
Gulf War 01/17/1991 17.0 19.8 18.7
Gorbachev Coup 08/18/1991 1.7 3.2 9.4
ERM U.K. Currency Crisis 09/16/1992 ‐4.6 ‐1.1 3.5
World Trade Center Bombing 02/26/1993 2.7 5.2 8.5
Oklahoma City Bombing 04/19/1995 3.9 12.1 14.5
Asian Stock Market Crisis 10/27/1997 1.2 1.3 15.3
U.S. Embassy Bombings Africa 08/07/1998 ‐6.5 2.4 8.5
U.S.S. Cole Yemen Bombing 10/12/2000 1.8 1.9 ‐2.8
WTC and Pentagon Terrorist Attacks 09/11/2001 ‐2.3 1.7 10.1
War in Afghanistan 10/07/2001 5.2 11.8 11.9
Bali Nightclub Bombing 10/12/2002 6.8 11.9 6.4
Iraq War 03/20/2003 0.8 12.4 15.5
Madrid Terrorist Attacks 03/11/2004 2.1 0.7 ‐0.1
London Train Bombing 07/07/2005 2.8 1.7 5.9
India Israel and Lebanon Bombings 07/11/2006 ‐0.2 6.7 11.8
Bear Stearns Collapse 03/14/2008 1.8 ‐0.0 ‐5.9
Russia Invades Georgia 08/08/2008 ‐1.8 ‐20.1 ‐27.6
Lehman Brothers Collapse 09/16/2008 ‐21.4 ‐21.0 ‐32.3
Israel Invades Gaza 12/27/2008 ‐4.3 ‐11.7 0.2
Boston Marathon Bombing 04/15/2013 2.4 4.0 1.8
Chinese Market Turmoil 08/24/2015 ‐1.1 7.7 ‐0.2
U.K. Votes to Leave E.U. 06/23/2016 4.0 2.9 12.3
Mean -1.4 0 2.6
Median 0.2 1 3.5

Data courtesy of NED DAVIS RESEARCH, INC.  T_901 1/03/2020

Investing involves substantial risk. Brown Wealth Management and Stratos Wealth Partners (the “Firm”) do not make any guarantee or other promise as to any results that may be obtained from the Firm’s “letter”. While past performance may be analyzed in the Letter, past performance should not be considered indicative of future performance. All indices are unmanaged index which cannot be invested into directly. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence.