War and the effect on the markets oct 15 (1)

War
The Effects On US Markets
Mark Boast – Oct 15
Wars, Conflicts and the effect on Markets - Oct 2015 1

What Happens to the Market if
the USA goes to War?
Introduction
This presentation discusses 2 periods when conflicts and wars abounded and the
impact on the American Stock Market
The topics / periods in question are:-
 4 Major Wars between 1926 and 2013
(Data provided by the CFA Institute – see Annex A)
 12 Conflicts / Wars from 1986 to 2011 (Period of 25 Years)
(Data provided by Deutsche Bank – See Annex A)

FIRST PERIOD in Discussion - 1926 - 2013
4 Major Wars occurred between 1926 and 2013 including:-
 World War II (Sep 39 - Sep 45)
 The Korean War (Jun 50 – Jul 53)
 The Vietnam War (Nov 55 – Apr 75)
 The Gulf War (Aug 90 – Feb 91)
 The Iraq War * (Mar 03 – Dec 11)
*For the first period in discussion, the source data did not include Iraq is excluded as
the source determined it had a major economic boom & subsequent bust and they
concluded had little to do with the US involvement in a war. (A later slide of a non-US
market, the UK FTSE 100, does show some comparisons and the Second Period in this
presentation also includes Iraq)
(Source CFAINSTITUTE.ORG)

The Effect of War on Stocks
The stock market
hates uncertainty and
leading up to war
there is plenty of it.
e.g. as now with
respect to Syria /
Middle East

Effects on Stocks and Bonds
Questions will abound during pre-war periods on when a good time might be to
exit stocks enter secure and traditional methods such as Bonds.
There are surprising answers to these questions!!
For Stocks
 War does NOT imply lacklustre returns for domestic stocks
 Instead they have OUTPERFORMED their long-term averages during wars.
Bonds
 On the other hand, bonds, usually a safe harbour during crisis, have
performed BELOW their historic averages during periods of war.

Capital Market Performance During Wars
The period of
study of 1926 to
2013 provides a
comparison
“control group”
Periods of war
Better in War Worse in War
The data below clearly shows the statistics for Stocks, Bonds & Treasury Notes
(Source CFAINSTITUTE.ORG)

Capital Market Returns During the War
For both large-cap and small-cap stocks
 Returns were UP*
*Vietnam War was an exception, the returns were worse than full period average but
were positive and above those of bonds (and cash).
 Volatility was DOWN **
**Except in the Gulf War when volatility was in line with the historical average. It is
believed this was because the war was short (less than a year); and the period
coincided with an oil price spike that helped push the economy into a brief recession –
further info on recession on later slide

Recession During the Gulf War
 During the Gulf War a brief recession
occurred in the US and was a new arising
 It reflected the changing U.S. economy.
 In previous wars, the economy was compiled
more of capital goods and natural resources,
which experienced greater demand to feed
the war.
 But in the 1990s, the US economy had shifted
away from heavy industry and toward a
knowledge-based economy. So military
demand had less of an impact on economic
growth.

Bonds & Treasury Notes
In War
 Bonds generally underperform
 This is likely because inflation has been higher. Stats show 4.4% in War as
opposed to average 3% for the same period
(Remember Bond returns negatively correlate with inflation)
 Also Governments borrow more during wars, driving bond yields up and bond
prices down.

SECOND PERIOD in Discussion
1986 - 2011
Two separate sources of data were sourced with supporting institutions
 The 1st dataset was from an established Chartered Financial Analysts (CFA
Institute).
 The 2nd dataset (as follows below) is from the world renown Deutsche Bank
(See Annex A for further Details of both parties)
The reason for analysing 2 separate and independent views from respected
parties was to identify if there was bias or conflict of views. There was not, as
the following data shows……

SECOND PERIOD in Discussion
1986 - 2011
Deutsche Bank (DB) examined 12 events involving US and Western forces over
past 30 years
First Event - April 1986.
 Missile Strike = Libya (Ordered by Reagan)
 In response to bombing 10 days earlier of Berlin nightclub where US soldiers
were killed.
Most Recent - March 2011
 Operation Ellamy – Coalition of US and Western forces (Inc UK) intervene in
Libyan civil war

Assessment of S & P 500 at times of
Conflict
Deutsche Bank analysts identified: -
 - A precise date on which the US entered the conflict
 - Three Data points on either side of the above date on the S&P 500
 - The highest point in the three months preceding
 - The date of conflict (referred to hereafter as ‘strike date’)
 - Market position one month after the ‘strike date’
The following is their conclusions…..

3 Months Preceding
(Source Deutsche Bank)
 In all 12 cases - Market on the ‘strike date’ was below the high point of the
three previous months
 Varying from 1% to 15% and an average drop of 5.9%

Post Strike
 S&P rose sharply by as much as 18% (1991 Gulf War).
 In 7 out of 12 cases, S&P reached a higher point than the highest point in the
three months preceding one month after strike date
 The average rally was 7%

The Whole Picture

Info Only – Indices Used
The indices used for each asset class were as follows:
 S&P 500 Index for Large-Cap Stocks;
 CRSP Deciles 6-10 for Small-Cap Stocks;
 Long-Term U.S. Government Bonds for Long-Term Bonds;
 Five-Year U.S. Treasury Notes for Five-Year Notes;
 Long-Term U.S. Corporate Bonds for Long-Term Credit;
 One-Month Treasury Bills for Cash;
 Consumer Price Index for Inflation.
 All index returns are total returns for that index.
 Returns for a war-time period are calculated as the returns of the index four months before the war and
during the entire war itself.
 Returns for “All Wars” are the annualized geometric return of the index over all “war-time periods.”
 Risk is the annualized standard deviation of the index over the given period.
 REMEMBER - Past performance is not indicative of future results!!!

Deutsche Banks View Points
 War / Conflict creates volatility Pushing Equities And Markets LOWER in
respect to increased likelihood of action.
 This is compounded by markets troubled that Central Bank’s plan are being
restrictive on stimulus programmes such as QE.
 Return to traditional, 'safe havens' such as Gold and Bunds is normal behaviour
associated with a pending military crisis and the US dollar should strengthen
(But note what was said above about poor % rates)
 Oil is likely to move positively
 Short-term fear and the weakening markets Offer Buying Windows.
 However - once the position becomes clear markets rebound strongly, as
Equities Offer Better Returns Over The Longer Term.

Independent Assessment 1
A paper published by the Department of Banking & Finance at the University of
Zurich concluded:
 We have observed stock market prices react very sensitively to the probability
for the outbreak of war.
 The pattern that has been confirmed shows that an increase in the
likelihood of war decreases stock prices and vice versa.
 Puzzling, however, is that once a war breaks out, stock market prices do not
decrease further but, the opposite, THEY INCREASE SIGNIFICANTLY. This
was true for all wars with a more or less lengthy prologue.
 HOWEVER - Wars that occur 'out of the blue' show a different pattern in that
their sudden outbreak and tend to DECREASE stock market prices."

Stanford University in the US analysing the impact of the 2003 Iraq War
determined: -
Different sectors respond differently around periods of conflict
 War is BAD for Consumer industries - airlines, finance and IT
 War is GOOD for gold mining and oil stocks, particularly the sectors of the oil
industry that would benefit from higher oil prices.
 Defence companies DON’T DO AS WELL AS EXPECTED. Defence stocks tend to
rise AHEAD of anticipated conflict but they do not participate to the same
extent in the wider rally that follows the onset of action.
Independent Assessment 2

Geography makes a difference
Stanford University in the US also determined: -
The Geography location of a conflict has effects, due to:
 A nation's geographic proximity to the war
 The involvement of their troops
 Their dependence on oil imports
(Oil will be covered in the next news brief!)

FTSE 100 – Iraq War - End 2002 to March 2004
March 19, 2003
Start of Iraq War
Though not pertinent here as it is a UK Index,
the trend shows one 15 month period during the Iraq War

Conclusions Up To and During Wars
Pre War Stocks (3 months before)
 Stocks unsure, volatile and underperform
 But MUST BE IN THE MARKETS to ensure you catch the boat before it sails
At War
 Higher inflation and increased government borrowing associated with war
time makes
- Shifting assets from stocks to bonds is a POOR CHOICE
- Buying a mixed portfolio of stocks for the long term is a BETTER CHOICE
Baron Rothschild quote 1815
200 years ago!
“Buy on the sound of cannons” (Conflict),
“Sell on the sound of trumpets” (Victory)

How investors should react if conflict
seems inevitable
 Try to ignore the humanitarian aspect; remember markets feel nothing
 Work out a long-term investment strategy mixing relevant assets that will do
well in war within a portfolio
 Try not to time the market or predict the top or bottom of a swing
 Make sure you are IN the market - A major risk is in being out of the market
when War takes hold – rises are quick – and seemingly inevitable
 Remember markets respond differently when there is no anticipation of
conflict – just a sudden onset

Annex A
Sources and Links
http://www.telegraph.co.uk/finance/personalfinance/investing/10290802/What
-will-happen-to-shares-if-the-West-strikes-Syria.html
Richard Dyson (Telegraph) 7:30PM BST 06 Sep 2013
https://www.cfainstitute.org/about/research/Pages/index.aspx
https://blogs.cfainstitute.org/insideinvesting/2013/09/25/u-s-capital-market-
returns-during-periods-of-war/
Mark Armbruster (CFA) 25 September 2013

Annex A
Source 1 - About the CFA Institute
 In 1947, four financial analyst societies—Boston, Chicago, New York, and
Philadelphia—joined forces for the purpose of promoting the exchange of
ideas and supporting the welfare of the financial analysts’ profession. In 1962,
a cadre of these financial analysts created the Chartered Financial Analyst
(CFA) designation. In 1963, the profession was formalized when 284
candidates sat for the first CFA exam and 268 CFA charters were awarded. In
2004, the Association for Investment Management and Research voted to
change its name to the CFA Institute.
 There are now 110,000 chartered members in 140 countries and territories,
and 137 member societies in 60 countries.

Annex A
Source 2 - About Deutsche Bank
Deutsche Bank AG (literally "German Bank" is a German global banking and
financial services company with its headquarters in the Deutsche Bank Twin
Towers in Frankfurt. It has more than 100,000 employees in over 70 countries, and
has a large presence in Europe, the Americas, Asia-Pacific and the emerging
markets. In 2009, Deutsche Bank was the largest foreign exchange dealer in the
world with a market share of 21 percent.
The bank offers financial products and services for corporate and institutional
clients along with private and business clients. Services include sales, trading,
research and origination of debt and equity; mergers and acquisitions (M&A); risk
management products, such as derivatives, corporate finance, wealth
management, retail banking, fund management, and transaction banking.

END
Any questions?

War and the effect on the markets oct 15 (1)

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Viewers also liked

Viewers also liked (20)

Similar to War and the effect on the markets oct 15 (1)

Similar to War and the effect on the markets oct 15 (1) (20)

Recently uploaded

Recently uploaded (20)

War and the effect on the markets oct 15 (1)