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Money Talk

Luke F. Delorme: Markets and global crises

On Feb. 24, we awoke to the horrific news that Russia had invaded Ukraine. Unfortunately for investors, this comes against a backdrop of higher inflation and projected rate hikes by the fed. As of Thursday morning, the S&P 500 had fallen more than 6 percent in just five trading days and more than 13 percent year-to-date.

Investors are understandably spooked. These types of geopolitical crises highlight the need for investors to establish a plan and stick with it.

When monthly returns are rising steadily, as they generally were last year, it was so easy to put our feet up and enjoy the ride. Anyone can handle “risk” when it doesn’t materialize.

Investment success is rarely about outsmarting or outworking other investors. Those approaches may seem to work sometimes, but it is difficult to distinguish luck from skill. A mountain of evidence shows there is no way to reliably time the market or pick winning stocks. Warren Buffet's edge is not his smarts. Rather, he defies short-term impulses with a disciplined demeanor. Our own behavior is really the only element within our control. An investment strategy — a plan — provides a framework for managing our emotions and providing discipline.

When the widely anticipated Russian invasion was launched overnight on Feb. 23, the U.S. market tumbled by more than 2 percent at the open on Thursday. Yet by close that day, it had more than recovered. The conflict has only begun, and the market will respond to developments, good and bad, as they emerge. These patterns will be as unpredictable as the day-to-day news, and investors have no control over this dynamic.

History has shown that markets often stumble around major geopolitical events. The good news for long-term investors is that investment success does not require that they respond. Markets invariably recover, but the magnitude and length of these cycles is highly variable and cannot be timed effectively.

Looking back at a few major market events of the last 20 years, we can see there is no predictable pattern for how the market will react.

Consider Sept. 11, 2001. The morning’s events came as an astounding blow to most Americans. The stock market closed for an entire week. When it finally reopened on Sept. 17, stocks fell by 4.9 percent. The market bottomed a few days later, down 11.6 percent from the close on Sept. 10. However, the market recovered to its pre-9/11 value just 22 days after the attack.

The U.S. launched an attack on Iraq on March 19, 2003. On that day, the S&P 500 index increased by 0.9 percent. Markets reflect all publicly available information, so stocks may hardly change in response to expected events. No immediate downturn followed this otherwise historic moment.

A more severe downturn took place the day of the Lehman Brothers Bankruptcy. This event may have been the defining moment of the years-long global financial crisis. The bankruptcy was announced on Sept. 15, 2008, a day when the S&P 500 fell by 4.7 percent. The market continued to tumble thereafter and did not reach a bottom until March 9, 2009, at which point it was down 46 percent versus the day before the announcement. The financial crisis delivered the second largest downturn in U.S. stock market history, yet the S&P 500 recovered to pre-Lehman levels by Dec. 21, 2010. and continued to rise for several years thereafter.

These are just tidbits of history, but the stock market has always proven its resilience through turmoil. It endured the Great Depression, Pearl Harbor, President Kennedy’s assassination, the Vietnam War, U.S. inflation peaking at 13.5 percent, Black Monday when the stock market tumbled by 23 percent in a single day, and countless other events we would probably rather forget.

This news from Ukraine is deeply disturbing, and this is a difficult time for investors. These are the times when it is so important to have a plan and stick with it. Emotions will inevitably run wild as our minds race to the worst possible conclusion. Remember that those who have maintained the discipline of a plan have always found a light at the end of the tunnel.

Luke F. Delorme is director of financial planning at American Investment Services in Great Barrington. He can be reached at LukeD@americaninvestment.com.

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