There are additional consequences of this conflict. While not primarily about oil and energy, there is a risk of supply disruptions for those resources. If you think people panic when Sony PlayStations aren’t available, imagine how they’d feel if they couldn’t put gas in their car. Oil pipelines from Russia supply a sizable portion of the fuel Europe uses. Conflicts lead to supply disruptions, a lack of supply leads to higher prices, and the rise in oil prices leads to even more inflation. This could force the Federal Reserve to raise interest rates even more, which could further hurt the market.
All of these issues are coming together and culminating into a cloud of economic anxiety. We need some sort of financial Zoloft, and we can find it in the form of historical context. It is helpful to explore market history to understand how markets and investor psychology reacted during similar times of hostility. When we look back through market history we can see that markets typically normalize through most events, even the most extreme ones. While past performance is not a guarantee of future results, it does provide us with a guide as we look at the weeks to come.
From the Russo-Japanese War of 1904 to World War I and World War II to the Korean War to the Cuban Missile Crisis to the Bosnian War to Sept. 11, we have more than a century of tragic events around the globe, and most incidents sent the markets into a nosedive — 24% corrections, 30% corrections, and on and on as I go down the list. On average, markets went down about 13%. But what’s more important is looking at where the markets were three months, six months, a year or three years afterward.
Here’s the good news. If you take all of these events and look at the Dow Jones Industrial Average three months after initiation, the markets are up almost 2% on average. At six months that rises to almost 5% on average. In most cases, after a year markets are up on average over 12%. Three years brings that to nearly 30%. In other words, on average the fear in markets is typically overstated relative to the actual market performance.
I’m here to remind you that corrections happen all the time — roughly every 1½ years. When they come, they’re not so pleasant. Even though we have no control over the next international twist or turn, we do have control over how we invest. If we invest in stable, dividend-paying stocks and have adequate levels of dry powder we can better navigate these periods of uncertainty. As a reminder, dry powder refers to safety assets within your portfolio (cash, U.S. treasuries and investment-grade bonds). That, combined with some perspective of time, has proven to get us through the temporary pullbacks.
The world is not ending. It’s the fear of uncertainty that casts a long shadow on the markets, which is completely understandable. However, we need to maintain a level head and stay financially disciplined. The worst thing we can do for our portfolios is panic.
Look at what we’ve recently overcome. The COVID pandemic completely shut down the global economy for a quarter of a year, but we’re still standing. In fact, the market is higher despite all of that uncertainty, dread and unrest. It’s our human emotion that makes the markets so volatile, even more so than the events that trigger that emotion.
Investors worry that every temporary bump is permanent. The most likely way to make them permanent is human error. If you’re down 20% or 30% and decide to jump ship, you are making it permanent when it doesn’t need to be. Through over two decades of my working with clients, I’ve found that the happiest retirees don’t check their portfolios every five minutes. They trust the long-term trends, even during times of strife.
This is a formula that has proven to work throughout history despite wars, recessions and global pandemics. The next time you see a scary headline about what’s happening, remember that markets are resilient, and I hope you can be too.
Wes Moss is the host of the podcast “Retire Sooner with Wes Moss,” found in the podcast app right on your smartphone. He has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than 10 years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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