Markets in 2022: Back to Cold War Times?
East or West, home is best. However, this might no longer work for Russians, whose homeland is now suffering from sanctions, imposed in response to death and ruination Putin’s regime brought to Ukraine.
Also worried about the state of its economy, Europe is witnessing a military conflict of a scale that hasn’t been there since World War II. Likewise, investors globally are watching volatility waves hitting the markets, and wondering what the tsunami of sanctions will bring in the short- and long-term perspective. At the same time, the tensions between the U.S. and China don’t seem to be subsiding.
Many experts now try to shed some light on the future situation by dusting off the analyses of the markets during the Cold War. Which is only logical as the world is living in the age of events that got a Wikipedia page titled “Second Cold War.” Let’s try to look through that history lens too.
How markets reacted to the Cold War
The Cuban Missile Crisis of 1962
A nuclear superpower on the present U.S.–NATO chessboard is reminiscent of one particular moment of the Cold War—the Cuban Missile Crisis. Back then, in October 1962, the confrontation over missile deployments in Cuba and Turkey was the tipping point of the Cold War, where a full-scale war was a move away.
At the beginning of the crisis, Dow Jones signaled a slowdown in a surging market, with a gain as small as 1.1%. However, this stumble remained just a slight hint of the 1960–1961 recession. In three weeks, the Dow made a 12.1% leap up and reached 24.2% in nine weeks and 30.4% in 18.
Alexander Chartres, Investment Director at Ruffer, says that the post-Cold War era has been overall a mild period for financial assets: “three decades of above-inflation returns have been underwritten by globalization, falling interest rates, lower inflation, technological progress and geopolitical stability.” The re-emergence of China and its new productive interaction with the West were at the core of the market transformation, enabled by the collapse of the Communist bloc and the defeat of the U.S. in Vietnam.
Other examples to consider
What is evident so far in the U.S. stock market history is that financial crises do more harm than military ones. For instance, markets saw worse times during the crisis of 2008, not after the Sept. 11 attacks. According to UBS Global Wealth Management, markets usually fell during the first week of a war or other military conflict, but most of them bounced back in three months or faster.
The major factor that contributes to the massive selloffs at the beginning of wars and conflicts is uncertainty. Once the picture gets more or less clear, in most cases, the markets tend to stabilize bit by bit.
However, not every armed conflict of the twentieth century followed the pattern precisely, and all were subject to larger economic forces.
For instance, the Vietnam War is an exception, with stock markets during and after the war remaining flatlined for almost twenty years. Last but not the least, the Iraq and the Afghanistan wars did not have exactly positive consequences for the U.S. economy.
