War and your Portfolio
With the recent assassination of Iranian Major General Qasem Soleimani and the following counterattack on Iraqi bases housing US forces earlier this week, many pundits have prophesied another war in the Middle East (since then, both sides seem to have backed down). During this time, we received questions from our clients on what to do with their stocks in a war-time scenario. We quickly referred them to what the great Phil Fisher wrote in his 1958 book “Common Stocks and Uncommon Profits” – which we reproduce here.
“To sell stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying... However, here that problem presents itself. How fast should he buy? How far down will the stock go? As long as the downward influence is a war scare and not war, there is no way of knowing. If actual hostilities break out, the price would undoubtedly go still lower, perhaps a lot lower. Therefore, the thing to do is to buy but buy slowly and at a scale-down on just a threat of war. If war occurs, then increase the tempo of buying significantly[1] “
While his advice is very clear, was Phil Fisher right? Should we be buying when war breaks out or holding on to our wallets? Let’s take a look at the data for the most recent Middle East conflicts and the impact on the stock market.
The Gulf War
The Gulf War started on 2nd August 1990 with Iraq’s invasion of Kuwait and ended on 28th February 1991[2] During that time, the S&P 500 returned 4.44% and the MSCI All-World index returned 1.78%. Sure, returns were positive but did that opportunity to buy exist? Let’s look at the graph of the S&P during that time (snapshot starting roughly a month before the beginning of the war and ends about a month after to capture pre-war tensions and post-war stabilization).
S&P 500 around Gulf War
From the peak to the trough, the American stock market corrected 22% and in the subsequent rebound, rose more than 27%! The MSCI All-World index corrected and rebounded with a very similar pattern too. All of this happened in a very quick period of time, and thus to take advantage of the rapid movement, timing would have been near impossible and investors would have missed out if they sold in a panic. However, those who followed Fisher’s advice would have been rewarded handsomely.
The Iraq War
We analyse the Iraq war during the heaviest fighting starting with US forces landing on 20-Mar-03 and George Bush’s infamous “Mission Accomplished” speech on 1-May-03. During this time, the S&P 500 returned 4.65% and the MSCI All-World 5.7%. Looking at the graph of the S&P 500 (again starting/ending a bit before/after the war), we see a similar pattern observed from the Gulf War.
S&P 500 around Iraq War
Once again we see a sharp correction (13.47%) and a quick reversal (near 20%), which was similarly reflected in the MSCI All-World Index (see below).
MSCI All-World Index around Iraq War
Again we observe the time frame from correction to boom to be very short, thus giving more credence to Fisher’s advice.
The Vietnam War
Now both the Gulf and the Iraq war were decisive military victories for the United States (I highlight the world “military” as the long-term success in Iraq is certainly up for debate). Upon showing this data to a clever client he quickly asked me “well, what happens if the US losses or there is a prolonged conflict.” To answer that, we need to look at how the S&P 500 performed during the Vietnam War, a conflict which was both prolonged (20+ years) and a military loss for democratic powers.
S&P 500 during the Vietnam War
According to Wikipedia the Vietnam War lasted from November 1955 to April 1975 (we feel that we should start the chart at the Gulf of Tonkin Incident on 2-Aug-1964, but let’s not get into a history debate). During this time, the S&P 500 nearly doubled (from ~45 to ~86). In fact, you could argue, that the gain was actually nearly 3x as US forces stopped their combat involvement in Vietnam on 15 January 1973 (after the Paris Peace Accord was signed). Through the Vietnam War, the market went through many corrections/cycles (as can be seen in the chart), implying that the market took the war in its stride, and started to weigh other factors more heavily. During this period, there were both great bargains to be had (caused by extended troughs), and immense wealth created, despite the “full-blown war scare.” (For more on the market correction in 1973-74 see footnote below[3])
Other Asset Classes
Until now we’ve just focused on equity markets. It would be important to look at how the other asset classes did during wars[4].
The data shows that, during war time, volatility across asset classes tends to be less than average (which means a lot of the panic might be in investor’s heads rather than actually present) and that moving into debt, might give you lower volatility, but will give you far worse returns. Further, the data (from 1926-2013) shows that despite multiple world and regional wars, equity markets have given double-digit positive annualized returns.
In conclusion
It seems that historically, Phil Fisher nailed it with his advice. In the outbreak of war there is a sharp correction in stocks that if taken advantage of, does overtime provide excellent returns. The speed of that cycle is very dependent on the nature of the conflict, thus trying to time the market is ill-advised. Instead, keeping calm and methodically buying on the way down and up seems to be the way to go. So, while we are no proponents of war, there significant benefit to be gained by calm and steady investors during these unfortunate periods.
[1] Fisher, Phil. “Common Stocks and Uncommon Profits” Page 146.
[2] Dates taken from Wikipedia
[3] The bear market of 1973-1974 was not actually a function of the Vietnam War but instead caused by a combination of the Yom Kipur War, inflation, and the Watergate scandal. The rebound after the bear market was also massive.
[4] https://www.investopedia.com/solving-the-war-puzzle-4780889