The fog of war
The fog of war is a phrase that captures the uncertainty of military operations, the uncertainty regarding the aggressor’s intent and abilities, and the uncertainty regarding the defender’s capability and tenacity. It also captures the unknown outcomes for those impacted. We cannot predict what will happen and how it will change the world or markets, but the world will be different.
Carl von Clausewitz was a Prussian general who fought in the French Revolutionary and Napoleonic Wars and the phrase “fog of war” is often attributed to him. What he actually said, “war is the realm of uncertainty; three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty.” The phrase has now become a cliché, used to describe the complexity of military conflicts, capturing the uncertainty of outcomes. Uncertain outcomes even for those not involved in the war, but potentially affected, like global markets and therefore investors.
There is no doubt the Russian invasion of Ukraine will have a short-term impact on markets. The price of energy, it has been noted, will rise and has risen. In a global economic environment already facing inflationary pressures, the impact will likely influence the price of goods and services and supply issues are likely to mount.
As one would expect, historically wars and conflict create uncertainty for markets. You can see the impact of select geopolitical events on global stock markets below:
Table 1: Geopolitical events and stock market shocks (1969 to current)
|
MSCI World Index |
Calendar days to |
||||
|
Market shock events |
Event date |
One-Day |
Total Drawdown |
Bottom |
Recovery |
|
Russian invasion of Ukraine |
24 Feb 2022 |
(1.6%) |
|
|
|
|
Boston marathon bombing |
15 Apr 2013 |
(1.7%) |
(2.9%) |
3 |
10 |
|
London subway bombing |
5 Jul 2005 |
0.4% |
(0.2%) |
2 |
3 |
|
Madrid bombing |
11 Mar 2004 |
(1.7%) |
(2.8%) |
13 |
19 |
|
US invasion of Iraq |
19 Mar 2003 |
0.8% |
(1.9%) |
12 |
14 |
|
US terrorist attacks |
11 Sep 2001 |
(1.5%) |
(11.5%) |
10 |
30 |
|
Iraqi invasion of Kuwait |
2 Aug 1990 |
(2.2%) |
(19.1%) |
57 |
200 |
|
Yom Kippur War |
6 Oct 1973 |
(0.2%) |
(0.5%) |
4 |
9 |
|
Munich Olympics |
5 Sep 1972 |
(0.2%) |
(3.9%) |
41 |
59 |
Source: VanEck, MSCI, Bloomberg. All returns in Australian dollars. You cannot invest in an index. Past performance is not a reliable indicator of future performance.
Looking back further to the S&P 500, which has a longer history than the MSCI World Index:
Table 2: Geopolitical events and stock market shocks (1940 to 1969)
|
S&P 500 |
Calendar days to |
||||
|
Market shock events |
Event date |
One-Day |
Total Drawdown |
Bottom |
Recovery |
|
Tet offensive |
30 Jan 1968 |
(0.5%) |
(6.0%) |
36 |
65 |
|
Six-day war |
5 Jun 1967 |
(1.5%) |
(1.5%) |
1 |
2 |
|
Gulf of Tonkin incident |
2 Aug 1964 |
(0.2%) |
(2.2%) |
25 |
41 |
|
Kennedy assassination |
22 Nov 1963 |
(2.8%) |
(2.8%) |
1 |
1 |
|
Cuban missile crisis |
16 Oct 1962 |
(0.3%) |
(6.6%) |
8 |
18 |
|
Hungarian uprising |
23 Oct 1956 |
(0.2%) |
(0.8%) |
3 |
4 |
|
N Korean invasion of S Korea |
25 Jun 1950 |
(5.4%) |
(12.9%) |
23 |
82 |
|
Pearl Harbour attack |
7 Dec 1941 |
(3.8%) |
(19.8%) |
143 |
307 |
Source: LPL Research, S&P Dow Jones Indices. All returns in US dollars. You cannot invest in an index. Past performance is not a reliable indicator of future performance.
From a markets perspective, the impact of the COVID shut downs was much worse. Thinking about liquidity and credit crises such as the 1987 stock market crash and the GFC, these had a much greater impact on investments.
Through all of these events, from an investing perspective, it is important to concentrate on long term goals. Successful long-term investors survive short-term falls by sticking to investment principles that have withstood the tests of time. For portfolios, this may include better diversification. For equities, investing in profitable companies with strong balance sheets and stable earnings has historically given resilience to portfolios.
As you can see above, stock markets tend to recover from geopolitical events. The fog of war for investors is they do not know how bad the impact will be and how long it will take the market to recover. Should they be lucky enough to have their lives and good health, it is important then to remember the fog of war for those directly affected by the war. Our thoughts are with the innocent victims of this conflict and we recognise how lucky we truly do have it in Australia.
Published: 04 March 2022
Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.
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