The Markets and War

The Russian invasion of Ukraine and its possible spread to other areas is obviously the hot topic this week. As a financial advisor it’s difficult to discuss the potential effects on investors at a time when millions of innocent people are being threatened with having their lives, livelihoods and freedoms destroyed. There are many things in life more important than money but as it is my responsibility to offer some guidance on the latter, I will try to do so with the clear understanding that I am much more concerned about the human cost of this war than the financial one.

There is no shortage of opinions on how this might play out so let me offer a longer-term view as it relates to human nature. A quality that permits humans to survive is the ability to adjust and adapt to their circumstances. Take the example of a sudden death in a family. Initially there is an outpouring of panic accompanied by extreme sorrow and mourning. I have witnessed this many times and experienced it myself. At first, we feel like the tragedy is unbearable and wonder how we can possibly go on. In time we accept that we have no choice but to adjust to the new reality. Slowly we start to make plans again and return to some form of a normal life, even though the new normal may be much different. In most cases it isn’t long before what was once considered an impossible challenge, becomes possible. Getting through a disaster is what humans are uniquely good at.

When we apply this quality to investing, we begin to understand a pattern that often emerges when a disaster occurs. Let’s use the tragedy of the Covid virus that started in February 2020. Initially the market panic was almost record breaking as the Dow Jones Average fell 26% in just four days. It was one of the most dramatic drops I have ever seen, yet only a few weeks later the same markets were on their way to a remarkable recovery. What’s important to remember is that the virus did not go away, or even diminish at that time. It was our perspective on it that changed. As is our human nature, we quickly adjusted to the new reality and recognized that as in past disasters, we would find a way through it. At the same time investors realized that the negative market reaction to the crisis was overblown, as it almost always is. This trend can be seen repeatedly in market history when disasters occur, and observant investors have often taken advantage of it.

History does not guarantee the future, but we can still learn from it. I don’t know where this war goes from here, (as of this writing on Feb 24), but I suspect that we will quickly adjust to it and find a way to move forward. We will recognize that despite the horrendous human cost involved, the financial cost will be limited and workable.