When Edwin Starr sang this 1970 hit song he had the right answer “War, it ain’t nothing but a heartbreaker, friend only to the undertaker…” 1970 marked another year of US war in Vietnam. A year of rising inflation. Sound familiar? History doesn’t repeat itself, but it often rhymes — Mark Twain. Fast forward 52 years. We are older, but are we wiser? News of Russia/Ukraine war and escalating inflation fills our inboxes.
War, what is it good for? Human suffering, refugees, physical and economic destruction. Inflation and shortages. The New York Times reported 3/25/22: It is the largest displacement of Europeans since World War II, according to the United Nations. More than half of Ukraine’s children are no longer living in their homes.
How are we as investors and wealth strategists to react to this horrific news? Obviously as fellow human beings, with horror and compassion, but as investors, perversely, war and rising interest rates can generally be good for stock markets. According to an Advisorpedia 3/12/22 article, the author’s team looked at 50 major geopolitical and warlike events since the 1950s and found that US stocks tend to fall at the outbreak of war… and then almost always recover quickly from these plunges… dropping about 10% at the onset, but one year after they gain +11% on average.
The same is true for rising interest rates. A recent Morningstar article reports: “Since the Federal Reserve began tweaking its communication strategy in 1994 … the market… slightly underperforms in the first 3 months following first rate hike… and rebounds strongly in the 12 month period.” So hang in there! As Edwin Starr ends his song, “we must fight to keep our freedom, but Lord knows there’s gotta be a better way.”