The market reaction this time may not coincide with history. It should be noted that the Russia-Ukraine conflict happens in the environment of high inflation, with the possibility of the Fed raising several rounds of interest rates. When all dust has settled, the stock market will fall down from the high point as part of investors secure decent profits. Instead of swarming into the market, selling into strength should be recommended when stock prices are at the apex. The stock market will plateau and crest the moment when the war ends peacefully since there's little uncertainty.
HISTORY STOCK MARKET DRAWDOWN AND RECOVERY ANALYSIS SERIES
There will be a series of higher lows in the stock charts. What will be reflected in the stock market is a period of consolidation with stock prices slowly edging up in zigzags. However, the total uncertainty will gradually decline as the war continues. There are still a lot of factors that can add to the degree of uncertainty, such as how well different parties or countries negotiate with each other. It should be noted, though, that total uncertainty related to geopolitical risks will diminish despite the war is still underway. This happens when geopolitical conflicts finally break out. VIX CBOE Volatility S&P 500 Indexwill hike up. The volatility of the market, which can be measured by the.
This implies that investors are withdrawing from stock investment and seeking safer assets to withstand possible geopolitical issues. How the scenario will play out is anyone's guess.In reaction to this trait of high uncertainty, the stock market will show signs of capitulation, with accelerating speed dipping down. No one knows when the war will begin, to what degree different interest parties will combat one another, what kind of sanctions will be imposed, and what the incurred repercussions are. This is the period before the war has started, featuring the continuous build-up of uncertainty in the stock market. Using this principle, a stock market reaction can be summed up into three phases. Principle: Market will go down when uncertainty is growing. Now that stocks won't likely collapse facing geopolitical concerns, how stocks will react before, during and after the war? A general principle should be learned first. How will stock react before, during, and after the war But history shows stock will weather the storm and produce a decent return. Bond is much safer than stock, probably highly preferred by investors when warfare has begun.
It has also illustrated that stocks will outperform bonds during times of war. Thus large-cap can tolerate geopolitical risk much better than small-cap. Large-cap will generate positive returns with small fluctuation in all four wars listed above, while small-cap’s return is highly volatile, even being negative during Gulf War. This chart tells us that small-cap stocks will have a slightly better return on average than large-cap stocks during times of war, yet their risk level is well above that of large-cap stocks, with one being 20.1% and the other being 12.8%. The stock market will survive geopolitical issues generally and then generate a return for investors, but which category is better performing? Small-cap or large-cap? Stocks are better than bonds, large-cap are better than small-cap stocks
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