The Effect of Regional Conflict on the MarketIn this post, I'll demonstrate the impact of regional conflicts on the market; whether what we're seeing is the beginning of a recession, or a reversal.
I'll be going over Russia's invasion of Ukraine, referring to historical examples of regional conflicts and the impact they had on the market.
War is tragic. I would like to clarify upfront that this post is apolitical. It simply assesses current events and market movements from the perspective of an investor.
This is not financial advice. This is for educational purposes only.
Analysis
- With Russia’s invasion of Ukraine, we have seen this bull market’s first correction.
- Many fear that this may simply be a deadcat bounce before further downside, but this once again proves that this event was a case of ’sell on fear, buy on the bullets’.
- Pressure is applied to the financial markets as fear of war starts, and is relieved when the actual conflict starts.
- So contrary to common belief, the beginning of war, as tragic as it is, is a bullish sign for the markets.
- Markets move on surprises, and what’s happening in Ukraine is nothing new or surprising.
- Not only has there been tension building up for the past few weeks, we were aware of such a scenario for the past few years, with Russia’s takeover of Crimea.
- The point is that the more discussions there are about the plethora of probable scenarios and possibilities, the less likely it is for the market to crash when something worse occurs.
- Unless this war spreads to a global scale, which I doubt it will, I think the damage will be regional, and thus unlikely to cause a bear market.
- We’ve seen this through multiple cases in history: the Korean War, the Vietnam War, Gulf War, Afghanistan War, Iraq War, and the Crimean Crisis.
- This isn’t because armed conflict is good for the market.
- The conflict ending uncertainty is what drives the market upwards.
Conclusion
Headlines, responses from communities online, and fake news can drive short term reactions via sentiment, but it’s important to take a deep breath, and listen to what the market is trying to tell you.
Taking all of this into account, I believe that it’s more likely for us to see a recovery or return to the uptrend sometime later this year, with some turbulence early on. However, remember that the name of the game is to buy when it’s cheap, and sell when it’s expensive. By the time you realize that we’ve returned to a steady, sturdy bull trend without any factors of fear and bearishness to hinder the momentum, it may already be too late to buy cheap. Hence, my preference to buy 1000 shares of $SPY at $430, rather than buying 10 shares at $350.
While my entire long term outlook on the market remains optimistic, it’s important to remember that volatility is unpredictable. But that doesn’t necessarily mean that it’s everlasting either. I anticipate that there’s a high probability that the bull market continues, but volatility will play its role in shaking out the weak hands.
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