Time to Read: 5 minutes
General Qassem Soleimani, head of Iran’s elite military force and one of the most powerful figures in the Islamic Republic, was killed by an airstrike in Baghdad on Friday, January 3rd, 2020. The Trump administration ordered the airstrike to deter “imminent and sinister attacks on American diplomats and military personnel.” General Soleimani was viewed by many as the second-most powerful person in Iran behind Supreme Leader Ayatollah Ali Khamenei, who has vowed “harsh retaliation” for the killing.
Amid escalating tensions—which may or may not turn into a direct confrontation between the U.S. and Iran—many investors are wondering how stocks will react. Will events evolve into a full-blown crisis and possibly bring an end to the long-running bull market? While it is far too early to judge the scope of fallout, we find it worthwhile to consider a historical perspective. Crisis events happen all the time and the stock market often reacts immediately. Since crisis events are typically unexpected, investors are largely unable to prepare themselves, outside of adhering to fundamental asset allocation principles. Once the dust settles, however, investors can decide to act.
The chart below, courtesy of Ned Davis Research (NDR), marks crisis events since 1960 and investor reactions in the form of daily levels of the S&P 500 Index. In terms of which events affected the stock market over the long-term and which did not, we see no clear pattern.
Looking back even further, NDR has identified more than 50 crisis events since 1900 and analyzed their impact on the Dow Jones Industrial Average, as shown in the table at the end of the article. While some geopolitical escalations and outright wars did have long-term consequences, others did not.
In our personal review of the events, we observe that the crises with the greatest long-term impact on the market have been those which ultimately affected the U.S. or global economy in a meaningful way. For example, 126 days after the collapse of Lehman Brothers in 2008—synonymous with the start of the global financial crisis—the Dow Jones had declined 32.3%. On the other hand, 126 days after the Iranian hostage crisis of 1979, the Dow Jones was down just 0.3%.
As we will report in our upcoming 2020 Outlook, we believe the global economy has been showing signs of improvement (up until this event) and we have been looking to increase our exposure to equities to get in line with this fundamental improvement. The one factor that has kept us on the sidelines has been excessive optimism, which is usually a contrarian indicator for short-term performance. Perhaps the current escalation in tensions will curtail such optimism, offering us a better entry point for a potential allocation change.
We will continue to monitor events in the Middle East for the possibility of disruption to the global economy. For now, we remain slightly underweight equities as we begin 2020.
| DJIA % Gain/Loss Days After | ||||
| Event | Event Date | 22 Days | 63 Days | 126 Days |
| Panic of 1907 | 10/21/1907 | ‐9.6 | 5.3 | 14.7 |
| Exchange Closed WWI | 12/12/1914 | 8.1 | 5.5 | 20.4 |
| Woodrow Wilson Stroke | 09/26/1919 | 9.6 | ‐2.1 | ‐15.0 |
| Bombing at JP Morgan Office | 09/16/1920 | ‐4.3 | ‐12.9 | ‐12.2 |
| Market Crash of 1929 | 10/29/1929 | ‐4.2 | ‐4.0 | 10.6 |
| Germany invades France | 05/10/1940 | ‐23.6 | ‐17.9 | ‐9.9 |
| Pearl Harbor | 12/07/1941 | ‐2.4 | ‐9.6 | ‐16.0 |
| Truman Upset Victory | 11/02/1948 | ‐9.8 | ‐4.6 | ‐6.7 |
| Korean War | 06/25/1950 | ‐8.9 | 1.0 | 2.2 |
| Eisenhower Heart Attack | 09/24/1955 | ‐6.0 | ‐0.2 | 5.1 |
| Suez Canal Crisis | 10/31/1956 | ‐1.2 | ‐1.9 | 2.3 |
| Sputnik | 10/04/1957 | ‐6.8 | ‐5.0 | ‐5.4 |
| Cuban Missile Crisis | 10/21/1962 | 11.2 | 17.8 | 24.7 |
| JFK Assassinated | 11/22/1963 | 3.8 | 8.7 | 12.0 |
| Martin Luther King Assassinated | 04/04/1968 | 5.8 | 6.1 | 9.6 |
| U.S. Bombs Cambodia | 04/30/1970 | ‐5.0 | ‐0.8 | 2.6 |
| Kent State Shootings | 05/04/1970 | ‐3.3 | 0.1 | 3.0 |
| Penn Central Bankruptcy | 06/21/1970 | 0.6 | 5.3 | 14.1 |
| Arab Oil Embargo | 10/17/1973 | ‐9.6 | ‐11.5 | ‐10.3 |
| Nixon Resigns | 08/08/1974 | ‐16.9 | ‐15.4 | ‐10.0 |
| Iranian Hostage Crisis | 11/04/1979 | 1.2 | 6.9 | ‐0.3 |
| U.S.S.R. Invades Afghanistan | 12/26/1979 | 4.4 | ‐8.5 | 4.5 |
| Hunt Silver Crash | 03/27/1980 | 5.7 | 16.5 | 26.6 |
| Falkland Islands War | 04/02/1982 | 2.5 | ‐3.6 | 7.6 |
| Beirut Bombing | 10/23/1983 | 2.2 | ‐0.4 | ‐8.0 |
| U.S. Invades Grenada | 10/25/1983 | 2.1 | ‐0.5 | ‐6.9 |
| Continental Illinois Bailout | 05/09/1984 | ‐3.8 | 2.4 | 4.5 |
| U.S. Bombs Libya | 04/15/1986 | 0.2 | ‐0.7 | ‐0.7 |
| Financial Panic ’87 | 10/19/1987 | ‐14.4 | ‐12.6 | ‐10.6 |
| Invasion of Panama | 12/20/1989 | ‐3.5 | 1.2 | 7.4 |
| Iraq Invades Kuwait | 08/02/1990 | ‐9.8 | ‐15.6 | ‐6.4 |
| Gulf War | 01/17/1991 | 17.0 | 19.8 | 18.7 |
| Gorbachev Coup | 08/18/1991 | 1.7 | 3.2 | 9.4 |
| ERM U.K. Currency Crisis | 09/16/1992 | ‐4.6 | ‐1.1 | 3.5 |
| World Trade Center Bombing | 02/26/1993 | 2.7 | 5.2 | 8.5 |
| Oklahoma City Bombing | 04/19/1995 | 3.9 | 12.1 | 14.5 |
| Asian Stock Market Crisis | 10/27/1997 | 1.2 | 1.3 | 15.3 |
| U.S. Embassy Bombings Africa | 08/07/1998 | ‐6.5 | 2.4 | 8.5 |
| U.S.S. Cole Yemen Bombing | 10/12/2000 | 1.8 | 1.9 | ‐2.8 |
| WTC and Pentagon Terrorist Attacks | 09/11/2001 | ‐2.3 | 1.7 | 10.1 |
| War in Afghanistan | 10/07/2001 | 5.2 | 11.8 | 11.9 |
| Bali Nightclub Bombing | 10/12/2002 | 6.8 | 11.9 | 6.4 |
| Iraq War | 03/20/2003 | 0.8 | 12.4 | 15.5 |
| Madrid Terrorist Attacks | 03/11/2004 | 2.1 | 0.7 | ‐0.1 |
| London Train Bombing | 07/07/2005 | 2.8 | 1.7 | 5.9 |
| India Israel and Lebanon Bombings | 07/11/2006 | ‐0.2 | 6.7 | 11.8 |
| Bear Stearns Collapse | 03/14/2008 | 1.8 | ‐0.0 | ‐5.9 |
| Russia Invades Georgia | 08/08/2008 | ‐1.8 | ‐20.1 | ‐27.6 |
| Lehman Brothers Collapse | 09/16/2008 | ‐21.4 | ‐21.0 | ‐32.3 |
| Israel Invades Gaza | 12/27/2008 | ‐4.3 | ‐11.7 | 0.2 |
| Boston Marathon Bombing | 04/15/2013 | 2.4 | 4.0 | 1.8 |
| Chinese Market Turmoil | 08/24/2015 | ‐1.1 | 7.7 | ‐0.2 |
| U.K. Votes to Leave E.U. | 06/23/2016 | 4.0 | 2.9 | 12.3 |
| Mean | -1.4 | 0 | 2.6 | |
| Median | 0.2 | 1 | 3.5 | |
Data courtesy of NED DAVIS RESEARCH, INC. T_901 1/03/2020