The rapidly evolving situation in Ukraine is providing the first serious market threat since the arrival of COVID 19 in early 2020.
US share markets have entered a technical correction
Globally, share markets are continuing the market correction which began in January. As of today, the ASX200 index is down 6% since the start of 2022 and down 4% for the financial year to date.
This compares to the US markets, where the Dow Jones index is down 9% for the year, and the tech-focused Nasdaq is down 17%. The US markets are technically in a ‘market correction’.
Geopolitics increases the uncertainty factor
The ongoing share markets impact of the unfolding Ukraine situation is impossible to predict. However, investors should prepare for more volatility as markets react to the daily news cycle in Europe over the next few months.
History has a role in helping us reflect on the potential outcome of previous geopolitical flareups.
Since the end of World War Two, returns on the Dow Jones Index during periods of global crisis have resulted in the following:
Average return over the crisis period -6%
The average return 3, 6, and 12 months after the low market point of each crisis: +6%, +9%, +15%.
This data covers periods including the Iraq invasion of Kuwait in 1990, the first Gulf war in 1991, the Falklands Islands war in 1982, the 1987 share market crash, the Brexit vote in 2016 and the COVID 19 markets falls in 2020.
Riding out market corrections has always produced the best returns
Periods of market correction are the norm in long-term investing. It has always been my view that investors are likely to experience a market correction, resulting in a market fall of between 6% to 10%, once and possibly twice a year.
However, due to the high level of monetary pump-priming last year, investors had a relatively volatile-free 2021.
The best way to look at the current market volatility is that periods of market corrections remove a lot of the speculative money floating around investment markets. As a result, share markets become supported by higher levels of quality investment capital. In addition, good quality stocks have always bounced back quicker during the recovery of any crisis, as the data above indicates.
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