Russia attacked Ukraine on February 24, 2022. Immediately, global stock markets plunged. Crude oil soared above $100 a barrel. Food prices also shot up as did commodities such as steel, iron, and wheat.

Was the world coming to an end — again?

War always creates market uncertainty. Since World War II, military invasions have punched deep into the stock market, but the market has generally bounced back — often climbing higher over time. Will that pattern continue during the current conflict? What if other global hotspots erupt soon?

Should you reconsider your investment strategy during a global crisis?

Let's take a look at how investors have historically dealt with war and other externalities.

A Brief History of Stock Markets During War

There's almost always been a relationship between financial markets and armed conflict. Economic sanctions, restricting access to funds, producing weapons, and paying for armies all help shape the market conditions in a given economic environment. 

Stock markets are particularly reactive to public mood swings, and nothing stokes the public's fighting spirit — or its fear — like an outbreak of war. Therefore it seems logical that such an event would always tip the market's scale. To some extent, it does, but even a cursory glance at the last 100 years reveals a more complex relationship between war and global stock markets. 

The Economic Impact of the Red Revolution

In 1917, the Bolsheviks overthrew the government of Russian Tsar Nicholas II and created a new regime they called the Union of Soviet Socialist Republics (USSR). One of the USSR's first actions was to default on the international debt of the previous Russian government.

According to recent news reports, Russia may be preparing to do the same thing again in retaliation for the international community's support of Ukraine. If Russia can't pay its bonds — and it probably can't since it's in the worst economic state it's seen in 30 years — Russian bondholders around the world could lose their investments.

The Stock Market and World War II

Between 1938 and 1945, the Dow Jones Industrial Average generally tracked with the news of the war. When Pearl Harbor hit, the market dove but quickly bounced back ending the year with a positive return. Yet again, it dropped further when the Japanese outperformed themselves in the Battle of the Coral Sea.

The war news improved after 1942, however, and so did the Dow Jones. By the time the Axis powers surrendered, the Dow Jones had hit 180 points, almost double where it stood in 1938. 

By mid-1946, the market had entered new territory, topping out around 210 points. In general, U.S. investors who stayed invested throughout the 6 year period saw the markets and their portfolio values rebound. 

European markets, however, were a different story. Only the black market and gold thrived during this time.

Investing in a Post-9/11 World

Many investors today recall the market events around September 11, 2001. After the World Trade Center was bombed, markets dove 4.9% in one day. In 11 days, the Dow Jones bottomed out at 11.6% lower than it was on 9/10. It took just 31 days, however, for the markets to fully recover.

The 9/11 attacks changed many things about the world, but their effects on the stock market proved to be fleeting. It was a perfect illustration of how modern markets react to uncertainty.

Investor behavior and emotion impact the markets in the short term. Remember early 2021 when the GameStop action had everyone talking? The principle is the same. In the long term, external events often have little material impact on investors.

Investments That Rebound vs Investments That Suffer

What kind of investments tend to do well during a geopolitical crisis? Which ones falter when faced with uncertainty? 

When conflict occurs… Some investors want to cash out of the stock market and drop everything into commodities. (Please don't do this.) 

Others are convinced that only gold is a safe place for their money, so they sell their rental real estate for gold. (Don't do this either). 

No one can predict the future with 100% accuracy, of course, but we can look at the last 100 years as a guide. In that time, the stock market survived the Great Depression, World War II, the Korean Conflict, Vietnam, Watergate, 9/11, the Great Recession, and a thousand smaller crises. Historically, investors who stuck it out made money. Those who bailed lost their chance.

Consistent, unemotional investment patterns generally produce desirable results.

What About Stocks? 

The stock market is a highly reactive, and emotionally driven environment that can move up and down depending on how investors feel on a given day. Step onto a stock exchange floor one day, and you'll see how crazy it can get.

That's often why the market zigzags in the early days of a crisis. Investors tend to panic  when bad news first hits, then as time goes on they tend to relax and go back to their typical behaviors. So far, putting aside the other factors driving the market, stock markets have followed this pattern as the Russia-Ukraine conflict has unfolded.

For more about how war affects the modern stock market, check out this resource from Investopedia. 

Why are Commodities Crazy in Conflict?

Unlike stocks, commodities often hit sky-high prices or take a deep dive during a conflict. Here's why:

Commodities are tangible goods such as iron, wheat, coal, corn, and oil. Generally, they have to be mined, grown, harvested, drilled or dug up out of the earth. They have to be transported, exported, and imported. An advancing army can prevent farmers from growing grain, miners from digging coal, or oil transport drivers from going anywhere. 

Why does that matter in the current crisis?

Russia and Ukraine are the world's third and eighth largest suppliers of wheat. Their conflict caused prices to rocket upward almost overnight. In addition, Russia is a major global supplier of oil, gas, and gold; and Ukraine produces vast quantities of steel, iron ore, uranium, and titanium. 

The war places the global supply of all these products in jeopardy. As a result, the supply-demand curve has altered and global commodity prices have shot up.

Is Gold a Safe Haven?

Before 1971, the U.S. dollar was backed by gold. Consequently, it made sense to see gold as a good bet against inflation. Then from 1973-1979, a time of acute inflation in the U.S., gold returned an almost unbelievable 35%. Since 1979, however, gold has lost some of its luster as nearly every other investment has outperformed it long-term.

If you are investing between 1973 and 1979 or if you live in war-ravaged Europe in the early 1940s, then gold is a great buy. Otherwise, gold might fail to measure up to the hype that sometimes surrounds it.

Is Cash King in a Crisis?

You should always have enough cash in the bank to cover at minimum 3-6 months of living expenses. You could even make the argument to have a some small amount of cash on hand. Any additional cash beyond this might be better served invested elsewhere — not squirreled away in your savings account or underneath the mattress. The challenge with cash is that it may mean you’re losing buying power, especially in today’s high inflationary environment. Whether inflation is running at 2% or 8% you most likely need your money to at least keep up with it. 

The Potential Impact of the The Russo-Ukrainian War

What will the current conflict do to global investors? No one knows for sure, and none of us can control what will happen on the other side of the world. 

We can assess the current situation, however, and determine the best way forward for our own investments.

What's Going on in Ukraine?

Russia's invasion of Ukraine is the most recent flashpoint in a long-standing tension between the two countries. As of mid-April 2022, Russian forces have failed to make significant headway into the country but have managed to attack its capital through airstrikes. 

While the tension springs from a tangled ethno-linguistic, geo-political history, the war is fought economically and militarily. That's why it affects nearly everyone on the planet right now.

Effects on Global Commodities

The conflict will disrupt the world's coal, oil, and agriculture supplies. As a result, many low-income countries are projected to experience a severe food crisis. In the U.S., we quickly experienced a rise in gas prices. 

Europe is likely to get hit harder than the U.S. because most of Europe relies on Russian oil and Ukrainian corn. Without those commodities, prices will surge, buyers will lockdown, and businesses will suffer.

American investors are much more insulated from the war's effects because the U.S. produces much of its own oil, wheat, corn, and steel. That's not to say we won't see higher prices and flagging consumer confidence. We're just unlikely to experience the same disruption as our European counterparts. 

The No. 1 Rule for Investing During Market Uncertainty

Billionaire Mark Cuban says, "When you don't know what to do, do nothing." - that’s not bad advice. 

In other words, don't change an otherwise well-thought-out investment strategy every time the world experiences a crisis, hardship, or turmoil.

Large-scale global crises always create market uncertainty. That's no reason to fear the future, however. Wise investors stay calm and re-evaluate as needed. And may even stick with the plan they made when everything felt safer.

In the current situation, our prayers and support are with the people impacted and suffering in the Russia-Ukraine conflict. But our investment strategy isn't shaped by what happens in Kyiv or Moscow. It's developed according to what is best for our families futures.

Would you like to talk to an experienced wealth management professional about how to invest during a global crisis? Make an appointment with Cooke Wealth Management today.