War – what is it good for?

As rock singer Edwin Starr’s lyrics to his song War (what is it good for) said: “Absolutely nothing”. We all agree with that sentiment, I am sure. Our hearts go out to the people of the Ukraine who are being targeted by a ruthless dictator right now. Sickening, to say the least. But this is a financial blog, and I wanted to examine the effects of geopolitical events, like war, for their impact on financial markets. I have a bit of data for you to examine in that light.

The data shows the stock market historically sells off when geopolitical events initially occur. The S&P 500’s average price return on the first trading day following the 12 events on the chart below was -1.5%, suggesting investors sold stocks due to the initial geopolitical shock. However, the data also shows the concerns faded over the following months. The S&P 500’s average 1-month price return following the events was +1.9%, showing the S&P 500 recovered its initial losses and more. Over the following 6 months, the S&P 500’s average price return was +7%. The two notable exceptions were Pearl Harbor, which led to further U.S. armed conflict, and Iraq’s invasion of Kuwait, which coincided with an early 1990s recession that lasted from July 1990 to March 1991. here’s the data:

Examining the above data, you might draw some understanding of why the S&P 500’s support level of 4300, which I have harped on in recent blogs as being vital to see held, is holding out. In fact, we are seeing some strength come into the market just one week after the official invasion announcement was given by Russia on February 24th. Statistically, we might expect favorable market conditions for the coming markets into the spring. This lines up with the seasonal patterns of stock market strength to May.

One other potential factor that I would pay attention to regarding stock market returns: I just recorded a video on the relationship between oil and the economy (GDP) and the stock market- it should be published Monday. But here quick summary of my study:

There have been 3 spikes in oil over the last 30 years. Here’s the chart:

Now, lets take a look at the stock market around the time of those big spikes in oil. I’m using the broad-based NYSE index rather than a more concentrated market index like the S&P 500 or the DJIA for this illustration. You will note that market corrections or crash seem to line up around the periods of oil spikes. In fact, the market crashed hard after the 2000 and 2008 oil price spikes. Back in 1987, the market fell pretty hard (Black Monday!) – led from the rising oil prices that spiked a couple of years later. As an aside, Black Monday in October 1987 was my first day on the job in the financial industry. I started as a credit and collection analysis salesperson at Dunn & Bradstreet on that very day. What a day to start in the industry! Here’s the NYSE index chart illustrating a tight relationship between oil spikes and market crashes:

What to do, what to do?

The neartermed data regarding market reactions surrounding geopolitical events is biased towards short termed upside, as seen in the first chart I presented. However, my study of oil spikes and market crashes is concerning, per the two charts above. Short termed gain, longer termed pain? That is the question!

The good news is that you don’t have to be a victim of market behavior. You can profit in good times and bad. At ValueTrend, we have managed to earn very high positive returns in the recent market selloff – because we were prepared. We’ve done the same in past selloffs. You can make money in a volatile market, and our results prove it. Below is the gross (not subtracting fees) of our performance in the recent market madness vs. the S&P 500 and the TSX. The VTAG (ValueTrend Aggressive Growth), VTEP (ValueTrend Equity Platform) and even our VTINC (ValueTrend Income Platform) are showing positive returns in the face of significant losses for the markets. In fact, our Equity Platforms – even after fees, are showing anywhere from 13% to 15% alpha (better returns than the market) vs. the SPX in 2022.

 

 

It really comes down to studying historic trends – as I note above – in conjunction with following a structured plan to take advantage of recent market rotations.

When the going gets rough – that’s where ValueTrend’s active trading and dual-sided analysis make the difference. By combining sector rotation, individual stock technical timing, and fundamental quality control, we have a long history of proving superior returns when the going gets rough. Our motto has always been “Limit your risk, Keep your money”. That’s not just a marketing mantra. Its a deep seated philosophy that has been with us for over 30 years of managing money. You can check our long termed performance numbers here. If you are interested in portfolio management, you can contact us for a free consultation here. Or you can learn to formulate a strategy that will help you profit in any market with my new online Technical Analysis course.

Back next week with more insights. Constructive commentary is always encouraged – post your questions and comments below.

 

 

 

11 Comments

  • Kieth thanks as always for a thought provoking analysis of the charts. However I am a little confused. Where can we do an actual layover off the perpetual WTI, Brent and say TSX and or S&P in the same chart? There is research that indicates that when crude rises in excess on 100% in any given 12 month period there is a resulting recession. What I am tring to determine is what happens to energy stocks mid stream, E&P, refinsers, and services during theese draw downs. can you tell I am seriously overweight Canadian O&G.

    Reply
    • I present another chart that might help on the video posted next Monday (perhaps it will be up by Friday). But you can do a comparative overlay on stockcharts.com. i do these all of the time on the blog. You need to be a subscriber to their service, but its not hard to do–go to their “charts school” to find out how to do it.

      Reply
  • Interesting… This Oil spike theory kind of matches the big Sector Rotation vs Market Cycle graph where the market is at its top when Materials/Energy/Staples are leaders…

    Reply
    • That big head and shoulders neck line has been taken out on the S&P. Not good

      Reply
  • Might be a good idea to raise some cash ahead of a possible much larger correction.

    Reply
  • Keith – I love this article. Very few people are as good as you on seeing these big picture turns. You were right on oil, recently gold and likely on a potential market downturn soon. This is the first time in over a decade I’ve seen market leaders like Shopify drop as they have and the charts are showing crossovers into bearish territory. If we do move into a 1-2 year recession – what sectors would you recommend buying or would you begin to short – e.g. VIX instruments longer term?

    Reply
    • I still like commodities, and yes, we are slowly legging into gold. I do think that the staples are a place to be–noted that in our recent ValueTrend Update newsletter that was just sent out last Friday (subscribe if you don’t). Honestly, the way to play it is to play it as it comes. As I so often repeat (Howard Marks): You cant predict you can prepare. So, there are obvious inflation hedges and defensive positions (staples, value stocks) — and for the rest, we must watch the sector rotation charts for clues

      Reply
  • More Volatility?
    Looking at the VIX in 1998 when Russia defaulted on its debts sans WAR! the VIX was between 35-40 using a 5 day ema for 6 weeks.
    Peaking @49 on a daily basis.

    Reply

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