The market is attempting to catch its breath as the first quarter of 2022 ends. There was no shortage of events for the market to navigate, including the Federal Reserve’s first interest rate increase since December 2018, Russia’s invasion of Ukraine, and stubbornly high inflation pressures. The series of events sent the S&P 500 and investors on a roller coaster ride……..
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Geopolitical risk is rising as tensions between Russia and Ukraine escalate in Eastern Europe. Financial markets are watching closely as the situation evolves. Given these headlines, you may be wondering how geopolitical events historically impact the stock market. Below is a list of 12 historical geopolitical events from past decades, and the S&P 500’s performance in the days and months after each of the events.
The data shows the stock market historically sells off when geopolitical events initially occur. The S&P 500’s average price return on the first trading day following the 12 events was -1.5%, suggesting investors sold stocks due to the initial geopolitical shock. However, the data also shows the concerns faded over the following months. The S&P 500’s average 1-month price return following the events was +1.9%, showing the S&P 500 recovered its initial losses and more. Over the following 6 months, the S&P 500’s average price return was +7%. The two notable exceptions were Pearl Harbor, which led to further U.S. armed conflict, and Iraq’s invasion of Kuwait, which coincided with an early 1990s recession that lasted from July 1990 to March 1991.
Geopolitical risks are always a concern, and the analysis below is not intended to minimize the events. However, there is limited historical evidence of geopolitical events and international conflicts impacting U.S. stock market performance. In the absence of a direct impact, investors historically look past the events and focus on key long-term performance drivers, such as the economic environment and corporate earnings. Given the U.S.’s economic strength, we expect markets to look beyond the current geopolitical tensions.
The stock market is off to a volatile start in 2022, and history suggests it could remain volatile ahead of this year’s midterms. Midterm elections won’t officially take place until November, but the next nine months of campaigning and political speeches will give investors plenty to think about. January’s Chart of the Month aims to separate the emotion of politics from investing by looking at the S&P 500’s historical performance during election years.
History shows the S&P 500’s returns are typically lower during election years. Figure 1 graphs the S&P 500’s average price return during presidential and midterm election years against non‐election years. Since 1950, the S&P 500’s average price return during presidential and midterm election years is +7.2% and +5.9%, respectively. For comparison, the S&P 500’s average price return during non‐election years is +12.5%, while the average price return for all years since 1950 is +9.5%.
Figure 2 looks at historical S&P 500 returns from another political viewpoint ― the 4‐ year presidential election cycle. From a timing perspective, 2022 represents year 2 of Joe Biden’s presidency. Since 1950, the S&P 500’s average price return during year 2 of the presidential election cycle is +5.9%, which is the lowest average return across the election cycle. Taking the analysis a step further, history shows year 2 returns are generally weak regardless of which political party occupies the White House.
What is the takeaway? The S&P 500’s return is historically lower during midterm election years. It should be noted the analysis does not mean 2022 is destined to follow historical precedent, because it may not. Instead, it highlights how elections introduce uncertainty, which investors don’t like. If recent history is a guide, 2022 will likely be another politically charged election year. Above all, it is important to remember to separate your political beliefs from your investment decisions.
If you gassed up your vehicle or paid your energy bill recently, you probably noticed energy prices are soaring. AAA reported the national average for a gallon of regular gasoline was $3.41 on November 14th, up 60% from $2.13 one-year ago. Natural gas cost $4.79 per million British thermal units on November 12th, up 70% from $2.82 one-year ago. Soaring energy prices are starting to impact the economy. U.S. consumer prices rose +6.2% year-over-year during October, the fastest pace since late 1990. In turn, rising inflation pushed consumer confidence to a decade low.
Why are energy prices soaring? Current prices are not the result of a single demand or supply shock but rather the result of a combination of supply and demand factors converging. On the supply side, oil and natural gas investments declined after energy prices collapsed during 2014 and 2015. Since then, investors have pushed oil drillers to return capital to shareholders rather than reinvest in new energy production. Reduced oil and gas drilling capacity has left supply vulnerable to demand shocks like we are seeing today as demand recovers quicker than expected after the pandemic.
Where do energy prices trade from here? Forecasting energy prices is a difficult task, which is why we looked back at prior periods of soaring energy prices to understand what may happen next. Using weekly prices since 1990, gasoline prices fell by an average of -3% over the next 12 months after rising more than 60% year-over-year. Likewise, natural gas prices fell by an average of -24% over the next 12 months after rising more than 70% year-over-year. This does not mean energy prices cannot go higher, because they certainly can. However, it does suggest the worst may be behind us if energy supply and demand can move back toward equilibrium.
