The past few months have seen a number of troubling situations develop around the world. Russia’s involvement in the Ukrainian conflict has continued, and recently airstrikes began against the Islamic state extremist group in Syria. The growing list of global concerns may add to a sense of unease for investors.
Despite these issues, stock markets continued to soar to new highs through the middle of 2014 with the Dow Jones Industrial Average topping 17,000 for the first time on July 3, 2014. Is this is a sign that investors are in denial about potential problems that may be brewing? Or does it tell us that investors can look past geopolitical risks and focus more on fundamental factors when investing?
Dealing with distractions
As history shows, there are always areas of concern at home and abroad. In fact, since the year 2000, investors have experienced:
These are among the biggest headline issues that have come into play in the past 15 years. The stock market clearly suffered through some of those periods, with bear markets occurring from 2000 to 2002 and again from late 2007 to early 2009. Yet, the markets recovered as they have throughout history.
Bad news is part of the landscape
Today, major events across the globe can be felt close to home in a large and diverse, yet interconnected world. Investors are wise to stay abreast of how specific issues may impact their investment decisions. The question is whether the impact on the markets will be just a reaction to developments that is quickly overcome by other fundamental factors, or whether the event will create a secular change in the markets.
The S&P 500 Financial sector index peaked at 509.55 in February 2007, and then dropped to below 100 in early 2009. As of September 2014, it is back above 300, but a long way from its peak. The crisis clearly had a negative impact on that sector of the market that lingers to this day.
At a broader level, however, the stock market has more than recovered the ground it lost from 2007 to 2009. At the end of August, the Dow Jones Industrial Average stood at more than 17,000, 20% higher than the peak it achieved prior to the downturn that began in 2007.
It follows a long-term trend. Going back in history, the value of the stock market as measured by the Dow Jones Industrial Average has risen over time. There have been periods of decline. But the market has historically overcome these setbacks. From World Wars to the Great Depression to the Arab Oil Embargo of the 1970s to the tragedy of 9/11, business continues and companies keep finding ways to generate profits. While today’s headlines shouldn’t be ignored, be careful not to let them be overly influential as you position your portfolio for the long run.