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August 18, 2022

Investing during conflict and stagflation

Market commentary by eToro analyst for Romania, Bogdan Maioreanu


 The Ukraine crisis and spikes in economic uncertainty and commodities prices have rekindled “stagflation” fears of a toxic combination of sharp economic slowdown and higher inflation. The markets are nervous, trying to price any news about the conflict, oil prices increased briefly over 130 dollars per barrel. Markets are showing red, making last year optimistic investors look with dismay at their losing money portfolios. Investing during geopolitical conflicts and wars has always been tricky. But markets were resilient every time.

History taught us that markets emerged stronger from every war that happened in the last 100 years. In the 6 months following the outbreak of World War I, the Dow Jones Industrial Average lost 30%. Because the war had seriously affected the financial world, it was decided to close the US Stock Exchange. We can draw a parallel with the closure of the Russian stock exchange now. The Stock market opened after 6 months of closure and the Dow Jones surged that year 88%. At the end of the conflict, which lasted from 1914 to 1918, the American index gained a total of 43%, or an annualized 8.7%. In  World War II, at the end of the conflict, which lasted from 1939 to 1945, the Dow Jones gained 50% overall, or 7% annualized. At the end of the Vietnam War that lasted from 1965 to 1973, the US market realized an overall performance of 43%, or 5% annualized.

In a more recent history the terrorist attack of 9/112001 brought 15% selloff within days of the attack. The market didn’t find a bottom this time until 2002. But the reason was not the attack itself but the Dotcom bubble crisis that started a year before. The bear market of the time was caused by the rapid collapse in prices of high flying tech stocks, some of which went bankrupt and were delisted. It then went on to enter a bull market that lasted until 2008. U.S. invading Iraq: stocks jumped 2.3% on the day of the invasion and ended the year up 30%. Therefore there is a strong case that, if conventional, war does affect the Stock Exchanges on a limited time creating conditions to explosive growth.

All the above gains were not without drawdowns. The largest historical drawdown due to war was in conjunction with Nazi Germany’s entry into the Czechoslovakian territory in 1939 and the attack on France in 1940. The S&P 500 fell by 20.5% and 25.8% respectively during the following 22 trading days. During the oil Crisis in 1973, the S&P 500 fell by more than 17%. When the Soviet Union invaded Afghanistan in 1979, there was a 12-day consecutive index drop of about 3.8% in total. When Russia later took Crimea in 2014, there was a 2% drop.

History also shows that markets initially react poorly to spikes in uncertainty, like we are seeing now, selling first and asking questions later. This reduces valuations and expectations and helps sow the seeds for a market recovery. Governments also respond, and we expect to see this now. In Europe, for example, the most impacted of major regions, there are a number of strong “buffers”. From a weaker Euro, that makes Europe’s countries and companies more price competitive, to a pick up in government spending, led by defense and refugee aid, and with the ECB to keep interest rates at zero for longer, all will help protect the economy and ultimately the markets.

The conflict in Ukraine and its effects are bringing worries about stagflation. Last stagflation period in the West was in the 1970s. The investing playbook at that time was the  “hard assets” like commodities (DJP, XLE), real estate (XLRE), and “defensives” with pricing power, like healthcare (XLV), utilities, and consumer staples (XLP). Software, not existent in the 70’s, might do well as a “new defensive” tech segment. Relative equity losers are those exposed to consumers reducing their purchases, like automobiles, durables, and tech hardware. Financials (XLF) are also hurt by a flatter bond yield curve and reduced credit apetite.

However, having a diversified portfolio is important. In 1917, Forbes published a list of the 100 largest U.S. companies. When Forbes reviewed the original list in 1987, after the Great Depression, wars, the inflation of the 1970s and the postwar boom, 61 of the companies no longer existed. Of the 39 remaining, 21 still were in business but no longer were in the top 100. Only 18 were still in the Top 100, and with the exception of General Electric and Kodak, they all had underperformed the market indexes.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.


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