Legendary investor Baron de Rothschild once famously said: "The time to buy is when there is blood in the streets." Suffice it to say, 86% of people polled recently disagree. They believe the world's conflicts are the biggest risk to stocks, and with Ukraine boiling, NATO warning of a Russian invasion, Iraq torn in two and America bombing terrorists, we should all brace for market mayhem.
This is faulty logic. War is terrible and tragic, but history shows regional conflicts don't knock stocks much. They're usually too short and cover too small a piece of the world economy to whack commerce and earnings globally. It takes massive, global to sink stocks. Most skirmishes in modern market history - even those involving major powers like America and Britain - haven't had significant global economic impact. Today's conflicts, though catastrophic for people impacted directly, should prove no different.
Volatility fades fast
Not once has a regional conflict ended a bull market. They've brought volatility - normal as fear builds as conflict nears - but it usually fades fast. Sometimes conflict is avoided at the eleventh hour. Other times bullets fly but investors realise the skirmish lacks scope - terrible as war is for those directly involved, life goes on everywhere else. Business doesn't stop. Trade doesn't stop. This is a relief for stocks.
Consider the Korean War. The S&P 500, the broadest index with the longest historical dataset, suffered a quick correction at the outset. In USD, it lost 14% between 12 June 1950 - about two weeks before war began - and 17 July 1950. But stocks were back in the black by 22 September and kept rising. Over the entire conflict, from 25 June 1950 through 27 July 1953, the S&P rose over 25%.
Stocks fared fine during 1962's Cuban Missile Crisis, when nuclear war between the US and Soviets threatened. Once again, the S&P fell as tensions heated up in early autumn after America discovered Soviet missiles in Cuba. But stocks bottomed on 23 October, one day after President Kennedy announced the naval blockade. Markets rose the next day, when Soviet Premier Nikita Khrushchev called the blockade an "act of aggression" and told his ships to press on. Stocks barely blinked as the Soviets tested the blockade. When the ships turned around on 5 November, the S&P was up 9% off that October 22 low. The nascent bull ran another three-plus years.
What about the Middle East?
More recently, in the mid-1990s, stocks grappled with the Bosnian War. Markets were choppy in 1994 as conflict simmered, but world stocks (in sterling) bottomed in late January 1995, shortly after NATO airstrikes began in Croatia. Stocks gained even as fighting lasted through 1995, looking past atrocities like the Srebenica Massacre. From the 24 January low through year-end, world stocks gained 23.7%.
Here you might ask, what about the Middle East? The world's powder keg! Yet stocks react no differently to war in the Middle East. Conflict there has been near-constant since the dawn of modern markets, yet not once has the violence spread enough to threaten global commerce. Stocks fell in the run-up to the Six Day War among Israel, Syria and Jordan, but the S&P 500 rose during every trading session once war began. Markets fell before both official Iraq Wars - 1991 and 2003 - but soon reversed and finished strongly positive both years. Global markets rose 22.1% in 1991 and 19.7% in 2003 (both in Sterling).
Only once in history has conflict ended a bull market. 1938, when Hitler's invasion of the Sudetenland forced the world to start pricing in the likelihood of massive, destructive global conflict - World War II - and truncated a young bull market. It takes a huge war, with major powers facing off against each other across a global theater, for capital markets to suffer heavy enough losses to cause a bear market.
Barring a major and unlikely World War III-like escalation, today's conflicts don't have the necessary scope to derail global trade and this bull market. Iraq is only 0.3% of global GDP. Ukraine is only 0.2%. Now isn't the time to fear a meltdown, whether due to conflict or any other reason headlines hype. There are too many things driving this bull market forward for it to end now - this is the time for a melt-up. Be ready and own stocks like these:
Gaining market share
As the leading contract chipmaker, Taiwan Semiconductor lacks Intel's great brand image. But it's dominating its space while gaining market share and maintaining beyond-amazing 47% gross profit margins. It's cyclical, giving it more upside economic leverage than Intel, and should do better in this long bull market while selling at only 15 times my 2015 earnings estimate, with a 1.9% dividend yield.
Lithography gear, printers, copiers, cameras or scanners - Japan's Canon typically dominates and gains market share in seemingly boring but complex products requiring some technology edge. It's also lonely. Virtually no one forecasts its earnings. I like that. It's likely the world's most-ignored-as-a-stock big industrial or technology firm. I like that, too. It's at one times slowly growing sales, 1.3 times book value and 12 times my 2015 earnings estimate, with a 3.5% dividend yield.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.