Crisis Impact On Markets

The resurgent conflict between the Sunnis and the Shiites in Iraq has raised the issue of its potential impact on investment markets. Additionally, this weekend it is being reported that the U.S. is moving an aircraft carrier into the Gulf. Of course, this would enable the U.S. to launch airstrikes within Iraqi territory.

Investors will need to keep in perspective the impact these crisis events historically have on equity markets. At the time the issues in Syria arose, S&P Capital IQ prepared a report titled, Shocks & Stocks. Earlier this year we wrote a post, Market's Reaction To Geopolitical Events, that highlighted some of the information contained in S&P's report. One item that was referenced from the report was the below table.

From The Blog of HORAN Capital Advisors

Source: S&P Capital IQ

As can be seen above, the initial reaction to crisis events for the S&P 500 Index is negative; however, the median recovery days for the above events is 14 days (the average is 72 days.) Additionally, The Wall Street Journal prepared an article in early May that included a chart prepared from Ned Davis Research data. The chart below shows the initial negative market impact of a crisis, but six months following the crisis event the market, on average, is higher by 8.9%.

From The Blog of HORAN Capital Advisors

Source: The Wall Street Journal

For investors, selling after the crisis takes place has generally not been a rewarding one. Additionally, the events that tend to have the most negative and longer lasting negative influence on the equity markets are those that impact the financial markets directly like the Lehman bankruptcy in 2008 and the program trading event in 1987. If the Iraqi situation draws a military response from the U.S. and the market reacts negatively, this may be a buying opportunity for investors holding excess cash and/or overweight in bonds.