The basic point from the table is clear: on average the market recovers quickly from external shocks. Looking a little more deeply we see that on the three occasions (highlighted in grey) where a period of economic contraction was already underway, the exogenous event reinforced the trend in place.
So a more accurate description would be to say that the external shock is far less influential than the pre-existing market trend. If the market was already fundamentally strong, the external shock is temporary: any decline is shallow. On the other hand if the market was already fundamentally in a downtrend – it continues down.
So the most important consideration for the portfolio today is not the shock of the war itself, but rather to remind ourselves of where we were already.
The broad consensus prior to the Ukraine invasion, was that whilst inflation risks were on the rise, policy makers would not make any large errors, inflation would come under control and the backdrop of economic and earnings growth would continue.
So the trend was basically positive. The important issue to note, however, is the effect that the war has on the inputs to this trend. A more detailed discussion is available in our blog, but we can summarise by saying that on a number of fronts – energy, hard commodities, food supply – the war is making inflation worse and is therefore likely to effect the underlying trend negatively.
So what is the conclusion? The situation is finely balanced. A strong positive for your portfolio remains the continued outperformance of value stocks versus growth stocks. This trend was well underway prior to the Ukraine event, and remains intact.
Nonetheless: this a period of uncertainty where it pays to follow the market behaviour very closely, and potentially be more active than usual. In the weeks prior to the Ukraine invasion we had already raised cash levels. Whether or not these will deployed in the coming weeks depends on how events unfold – both the number of risks as well as the number of opportunities looks set to increase.
Regardless of the economic developments, we do of course hope, like everyone else, that world leaders will reach a solution so that everyone affected by this conflict can soon move again in freedom.