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Chapter 29: How War Impacts The Stock Market
Investing narratives like inverted yield curves and rising interest rates are trivial in comparison to geopolitical conflicts and wars.
This is an unpleasant topic to think about for obvious reasons, but as the data will show, as a long-term investor, you are going to live through many geopolitical conflicts in your lifetime. These conflicts can be scary, sad, and will have negative impacts on asset prices—making them a perfect cocktail of emotions that can lead to investors selling their portfolio at exactly the wrong time.
In this chapter, we review the impact wars, and other international crises have on global stock market and the implications for long-term, rational investors.
Defining an international crisis
A 2005 study written by Henk Berkman and Ben Jacobsen titled “War, Peace and Stock Markets” studies the impact of 440 international political crises on stock prices over the period 1918-2002.1
That is a shocking number as it works out to 2.5 crises per month.
How do Berkman and Jacobsen define a crisis?
They use the definition created by The International Crisis Behavior databases.2, Which states three criteria an event must meet to be deemed a crisis.
A threat to one or more basic values
An awareness of finite time for response to the value threat
A heightened probability of involvement in military hostilities.
To quote the paper: “An international crisis begins with a trigger that creates a foreign policy crisis for one or more states and ends with an act that denotes a qualitative reduction in conflict activity.”