Separating Decisions

The amount of time between the scary events taking place in our country and all over the world seems to be narrowing at a rapid pace. The human tragedies that the world is experiencing are unthinkable and beyond sad to watch. But looking at the market’s response to crisis, we learn that no financial decisions, specifically relating to your portfolio, should be made on the basis of geopolitical uncertainty.

I was surprised to see the futures open flat last night and trade higher this morning. But I shouldn’t have been, because a quick look at history reaffirms that events outside the market just do not get the response from stocks that you might imagine.

Here are a few examples.

  1. The Dow Jones Industrial Average had its best year ever in the first full year after World War I broke out. In 1915, it gained 81.7%. This gain has never come close to being duplicated, and will likely stand as an all-time record.
  2. U.S. stocks gained 15% in the two weeks following Hitler’s invasion of Poland.
  3. J.F.K was assassinated on Friday, November 22, 1963. On Monday the stock market was closed and when it reopened on Tuesday it gained 3.98%. This was the strongest move in a year and a half and is stronger than 99% of all days on record until that point. Also, in the six previous years, a move this strong had only happened one other time. The Dow finished 1963 finished up 17%.
  4. In 1968, the day after M.L.K was assassinated, stocks fell 0.59%. Then they rose over the next seven days. 61 days later, R.F.K was assassinated and stocks fell half a percent that day, then rose each of the next four days. The Dow gained 4% that year.
  5. Stocks were down less than 1% the day after Nixon resigned. Granted it was in the teeth of a bear market that would fall another 26% over the next four months, but the immediate reaction to the first and only presidential resignation seems rather tame.

It’s impossible to predict these events ahead of time, even the most plugged in experts don’t see them coming. And when they do occur, it’s equally as impossible to know how the market is going to react. And unfortunately, the sad reality is that there have always been problems in the world and they don’t seem to be going away any time soon. For these reasons, it’s important to separate the emotional response you feel when watching these events from the decisions related to your portfolio.