Stocktake: Investors shrug off Afghanistan turmoil

Dire headlines regarding the fate of Afghanistan on Monday last week didn't stop US indices hitting all-time highs.

Stocks sank later in the week after the Federal Reserve signalled it was preparing to pull back on stimulus, confirming investors are much more interested in monetary policy than Afghanistan.

Nevertheless, a “safer world is better for markets, and a less safe world is worse for markets”, cautioned the Bahnsen Group last week.

True, although market reactions to geopolitical turmoil can be counter-intuitive. Ritholtz Wealth Management's Ben Carlson has previously noted that the Dow plunged after the first World War began in 1914 but soared 88 per cent in 2015 – its highest annual return. Stocks gained 43 per cent during 2014-2018, or 8.7 per cent annually.

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The second World War was similarly counter-intuitive. Stocks fell after the 1941 Pearl Harbour attacks but rebounded within a month. The Dow eventually gained 50 per cent over the six-year war.

Stocks enjoyed annualised returns of 16 per cent during the 1950-53 Korean war.

During the 1962 Cuban missile crisis, the Dow fell only 1.2 per cent.

Stocks plunged following the 2001 September 11th attacks, but regained their losses within months.

There are countless other examples. Geopolitics matters, but it’s best not to let global developments unduly cloud your investment outlook.