Lessons Learned from Wars Over the Past 40 Years for Long Term Investors in U.S. Stocks | The Path to Becoming a U.S. Stock Master by Heihachiro Okamoto | Moneyクリ MoneyX Securities Investment Information and Media Useful for Money

The market is developing with the concept of Sell on the rumor, buy on the fact.

The situation in Ukraine has developed into the most feared scenario, as Russia has begun its invasion of Ukraine.

Following the news that Russia began its invasion of Ukraine on Thursday afternoon (February 24), the decline in U.S. stock futures accelerated in Japan time.

Chart 1 shows the bull-bear ratio representing the sentiment of individual investors, published weekly by the American Association of Individual Investors (AAII). Here, we present the net figure obtained by subtracting the bearish (bear) numbers from the bullish (bull) numbers.

According to this, the latest figure shows -30.3 points, indicating that there are more bearish individuals than in the last 9 years. The bull-bear ratio, known as a contrarian index, tends to rebound in stock prices as the number of bearish individuals increases.

[Figure 1] AAII Bull-Bear Ratio (as of February 24, 2022) Source: Created by Monex Securities from Bloomberg The opening of the S&P 500 in the New York market fell 1.65% compared to the previous day, starting trading at 4,155.8. It then dropped to a daily low of 4,114.7 (a decrease of 2.6% compared to the previous day), but subsequently followed a typical sell on the rumor, buy on the fact pattern. In the end, the day closed up 1.5% compared to the previous day, having risen 4.2% from the intraday low.

Regarding the Nasdaq 100, the price movement was more pronounced, with the opening on this day gapping down by 3.3% compared to the previous day. After hitting the day's low, the index rose by 7%, ultimately finishing 3.4% higher than the previous day.

Chart 2 summarizes the trends of the S&P 500, oil prices, and 10-year bond yields from the end of 2021 to the present.

This chart shows that since the end of 2021, amid rising crude oil prices, concerns over interest rate hikes, rising market interest rates, and a trend of selling stocks have continued. However, with the recent invasion of Ukraine by Russia, it can be seen that stock prices have bottomed out.

[Figure 2] Economic Trends in Russia's Invasion of Ukraine 3 Months Prior Upper left axis: WTI, upper right axis: S&P 500, lower section: US 10-year Treasury yield Source: Created by Monex Securities from Bloomberg Ultimately, the S&P 500 rose by 0.8% and the Nasdaq 100 rose by 1.3% over the last week.

Examining Stock Prices After the Start of Wars Over the Past Approximately 40 Years

We have conducted an analysis of the performance of US stocks before and after five wars over the past 40 years.

The five examples are: 1) the Soviet invasion of Afghanistan in 1979, 2) the Gulf War in 1990, 3) the Iraq War in 2003, 4) the Russian invasion of Georgia in 2008, and 5) the Crimea crisis by Russia in 2014.

The Soviet invasion of Afghanistan in 1979

On Christmas Eve in 1979, the then Soviet Union invaded Afghanistan. This war was an ignoble conflict for the Soviet Union at the time, lasting until 1989. After the war began, stock prices rose. There were significant corrections, such as Black Monday, but over the long period until the end of the war, stock prices increased by 173%, suggesting that the impact of this war on U.S. stocks was limited (Figure 3).

[Figure 3] Economic Trends in Afghanistan Conflict + 3 Months Before and After Top left axis: WTI, Top right axis: S&P 500, Bottom: US 10-year Treasury yield Source: Created by Monex Securities from Bloomberg

Gulf War 1990

In the Gulf War of 1990 that occurred in Iraq, one of the world's major oil-producing countries, crude oil prices began to rise before the war started, and stock prices fell with the onset of the conflict. The crude oil price, which was nearly $20 just before the war, surged with the onset of fighting, exceeding $40 within three months and reaching a peak before beginning a downward trend, stabilizing in the $20 range by February 1991. As for stock price trends, the S&P 500 hit its bottom around the time crude oil prices peaked, and then entered an upward trend.

[Figure 4] Economic Trends During the Gulf War + 3 Months Before and After Top left axis: WTI, top right axis: S&P 500, bottom: US 10-year bond yield Source: Created by Monex Securities from Bloomberg

2003 Iraq War

During the Iraq War, which lasted from 2003 to 2011, stock prices rose with the start of the war, contrary to the Gulf War, where stock prices had fallen until the outbreak of war. At this time, the price of crude oil, which had been rising before the war, took a significant downturn once the war began. Although crude oil prices rose later, the trend was that stock prices also experienced a significant increase. Subsequently, stock prices peaked in 2008, which was due to the onset of the first global financial crisis in the United States.

[Figure 5] Economic Trends Before and After the Iraq War (+3 months) Upper left axis: WTI, upper right axis: S&P 500, lower section: US 10-year Treasury yield Source: Created by Monex Securities from Bloomberg

Russia's invasion of Georgia in 2008

During the Russian invasion of Georgia in 2008, amidst the financial crisis, oil prices trended downward, and stock prices temporarily fell, but they increased by 2.3% in the short period of 12 days from the start of the war to its end.

[Figure 6] Economic Trends During and After the Russia-Georgia War (3 Months Before and After) Top left axis: WTI, top right axis: S&P 500, bottom: US 10-year Treasury yield Source: Created by Monex Securities from Bloomberg

The Crimea crisis by Russia in 2014

During the Olympics held in Russia in 2014, there was a temporary rise in oil prices and an increase in interest rates during the approximately one month period when Russia annexed Crimea from Ukraine. However, it can be said that the impact on US stocks was not significant, possibly because the invasion by Russia was assessed to be limited.

[Figure 7] Economic Trends During the 2014 Crimea Crisis and the Three Months Before and After Top left axis: WTI, top right axis: S&P 500, bottom: US 10-year Treasury yield Source: Created by Monex Securities from Bloomberg Looking at examples like this, the patterns of war and the global situation at the time are different each time, but basically, the decline of US stocks during a war is temporary, and the fallen US stocks are a buying opportunity, seems to be a lesson from the past.

Of course, the fact that the stock price rose last week does not mean that it will not decrease from now on.

No one knows how the current situation will unfold. Probably even President Putin does not know. Therefore, it is certain that market volatility will continue.

In response to the recent Russian invasion of Ukraine, the prices of oil and natural gas are soaring. However, Russia is by no means the only producer of oil and natural gas. Even if prices temporarily surge, history proves that excessively high prices tend to decrease over time.

If you are considering investing here

If you are considering additional investments here, it is important to first check whether there have been any changes to the business models of the stocks you are interested in, or if there has been a change in their performance outlook. If the only thing that has changed is the stock price, then this decline should be seen as an opportunity to purchase fundamentally strong stocks at a lower price in the long term.

If you want to make a safe investment in this situation, stocks that are expected to continue to grow in revenue and EPS, and are generating ample cash flow, may be solid investment options. Indeed, I believe that GAFAM + TN (GOOGL, AAPL, FB, AMZN, MSFT, TSLA, NVDA) are such stocks.