With the rank smell of geopolitical crisis again overpowering the air (not to mention the bidstack in the S&P500), Deutsche Bank’s head of thematic research Jim Reid thought it would be a good opportunity to highlight a table the bank’s equity strategists Binky Chadha and Parag Thatte did a few years ago examining what happens to the S&P 500 around domestic political and geopolitical events.
The two show that these events have typically been short-lived, with a median sell-off of -5.7%. They tend to take around 3 weeks to reach a bottom and further 3 weeks to recover prior levels. On average the market was +6.5% and +13% higher from the bottom 3 and 12 months after.
The other point the DB duo makes is that the underlying economic context tends to ultimately dominate. He highlights that:
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The oil embargo of 1973, with clearly visible negative economic impacts, saw the biggest selloff in the S&P 500 and the slowest equity market recovery since World War II.
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The Vietnam and two Gulf wars by contrast occurred against the backdrop of economic recoveries and saw sharp selloffs followed by long-lived rallies.
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The selloffs following President Kennedy’s assassination and President Clinton’s impeachment proceedings occurred during economic expansions and were again very short lived (down -4% but regaining their prior levels in under a week) and saw strong rallies thereafter, while the impeachment proceedings against President Nixon, which occurred in the middle of a recession saw a sharp selloff and rebound but this gave way to a renewed slide after.
As Reid concludes, “if you believe this template, much might depend on what you think the momentum was before the geopolitical sell-off.”
The point is that geopolitical events have rarely left a deep scar on markets but even before events escalated around Ukraine, markets were trying to come to terms with inflation and rate hikes. That – and not the ongoing theatrical false flag farce in Ukraine – will be the dominant theme for markets in H1 and likely beyond.
