Wall Street analysts say âgeopolitical fearsâ are frightening investors.
Thatâs a stuffy way of saying folks are freaked out about all these missiles zipping across the globeâŚ
Itâs true â the war drums are beating louder. And the tension is spooking Main Street investors. First there was the Syrian airstrike. Then the U.S. dropped the mother of all bombs in Afghanistan.
Thatâs enough terrifying news to make the average investor sell every share in his portfolio and use the cash to stock up on canned goods.
But if you study market history, youâll see that geopolitical events like the ones weâre witnessing right now can provide smart investors with a strong buying opportunity.
You just need to know what to look forâŚ
To get started, all you have to do is remember this simple phrase: History doesnât repeat, but it does rhyme.
Youâve seen that old saw on these pages before (unless youâre brand new âround these parts). And whatâs true for history is true for the markets as well. Weâve seen this show beforeâŚ
âAs investors, we need to be prepared in uncertain situations like these,â our own income specialist Zach Scheidt explains. âWe donât know when President Trump will drop the next MOAB. And we definitely donât know when Kim Jong-Un will test North Koreaâs next missile.
But one thing is for certain â if these events do happen, markets will sell off like they have over the last 10 days, if not more.â
Zachâs right. Investors will probably head for the hills if more bombs fall out of the sky. Thatâs where your opportunity comes into playâŚ
As it turns out, we donât have to search too far to find instances when scary or unexpected situations temporarily rankled the markets. Just last year, the Brexit bombshell slapped the Dow down more than 5% in just a couple of days, Zach notes. And the surprise defeat of Hillary Clinton tanked world markets long before anyone uttered a single word about a âTrump Rallyâ.
I know what youâre thinking â the marketâs worried about war right now, not election surprises. But research has shown that missile strikes and other military-related crises often cause a predictable, short-term decline in stock prices that are followed by a strong rally.
A new note from Charles Schwab explores how many of these short-term military scares and missile strikes have affected the markets. Even when the events occur decades apart, the market tends to display a similar reaction.
Check out the following chart, which overlays the S&P 500âs reaction during the Cuban Missile Crisis and the 2003 invasion of Iraq:
âStocks slid as geopolitical tensions rose, but when the United States took action with a military blockade of Cuba in October of 1962 the stock market rallied,â Charles Schwabâs Jeffrey Kleintop notes. âAbout 40 years later, the stock market reacted very similarly in the days leading up to, and in the year following, the invasion of Iraq in March of 2003.â
In both cases, buyers jumped in to push the market back to its highs about 50 days into the respective event. According to Schwab, stocks have averaged a 3% decline during âgeopolitical developmentsâ like these going back to 1980. As a quick comparison, the S&P 500 is now about 2.5% off its all-time highs posted in early March.
But you must remember that the world didnât stop spinning during these short moments of panic. Thatâs why we prefer to search for opportunities when the investing herd runs for coverâŚ
âLook at the sectors where people wonât stop consumption based on uncertainty in Asia or the Middle East,â Zach concludes. âAre people really going to stop buying medicine because Kim Jong-Un threatened a nuclear test? And are people going to stop buying household staple products because Russia-U.S. relations are considered poor?â
World events are causing plenty of uncertainty among investors these days. But a big opportunity to buy the dip could be approaching soon. Stay tunedâŚ
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Source: Daily Reckoning