Stocks have done worse ahead of a conflict than 'when the bombs started to fall'

Nicole Sinclair
Markets Correspondent

Tensions between the U.S. and North Korea have escalated, causing a spike in market volatility and a drop in stock prices.  It’s tempting to conclude that markets would deteriorate much more should the saber-rattling evolve into a war.

But history shows stock market performance is worse as people anticipate conflict than during the conflict itself.”Our key takeaway would be that the impact on stocks is far greater in the lead-up to conflict (S&P 500 [average drawdown of] 10%) than it is when the bombs begin to fall,” RBC’s Matthew Barasch observed in a recent note.The Cuban Missile Crisis in October 1962, which Barasch sees as the closest parallel to the current situation, is one example. The S&P was down 9% leading up to the crisis when the Soviet Union attempted to deploy ballistic missiles in Cuba. Meanwhile, the S&P was down only 2% during the 13-day period when both the U.S. and Russia refused to back down, a period which is “commonly viewed as the closest the world has come to global nuclear war,” according to RBC.

 

RBC Chart 2
The chart above from RBC shows the significant downside reaction in market ahead of seven historical events, including the Cuban Missile Crisis. The S&P was down 10% on average leading up to events, with downside for the first Gulf War reaching 18%.But once the actual events occured, market reaction was more muted across these events, as shown below, with the S&P up an average of 2%.
RBC Chart 8.11

“In fact, the actual beginning of conflict has often marked ‘the beginning of the end’ in terms of poor market performance,” he wrote.

To be sure, the seven events that RBC identifies may not be comparable to a potential nuclear conflict, which has escalated in recent days.

On Friday, President Trump reiterated his prior comments that he would not rule out a preemptive strike against North Korea.

sinclair tweet trump

 

Barasch explained looking at the market reaction is instructive when thinking about the market reaction to current conflict.

Donald Trump could 'blunder' into Third World War with North Korea threats, warns former US intelligence chief

Donald Trump could ‘blunder’ into Third World War with North Korea threats, warns former US intelligence chief

In some instances, once the conflict was resolved a prolonged bull market ensued. These examples, including the Cuban Missile Crisis and both Gulf Wars, represented key buying opportunities. For now, despite the escalating threats and rhetoric, the market is still less than 2% off its all-time highs.

Nicole Sinclair is markets correspondent at Yahoo Finance

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