From a historical lens, localized conflicts generally do not have a sustained market impact
Signage for the Toronto Stock Exchange in Toronto’s financial district. Photo by Cole Burston/Bloomberg The past decade has been a good one for many Canadian households. Families with financial assets, either through investments in brokerage accounts or in their private or public pensions, have watched their net worth steadily rise, while other asset classes, such as real estate, have gone up exponentially as well.
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However, growth does not go up in a linear fashion, especially in times of turmoil. Even in times of growth and innovation, there are inherent tensions between different interest groups and stakeholders. Hindsight is 20/20, but markets have been resilient in weathering wars and sanctions, recessions, pandemics and trade wars.
Today, persistent inflation growth and the conflict between Russia and Ukraine have caused corrections in global stock markets with the exception of Canada. Our markets have fared reasonably well, supported by higher prices in the resource sectors.
From a historical lens, localized conflicts generally do not have a sustained market impact. Russia accounts for approximately 1.5 per cent of global gross domestic product, and is a significant exporter of energy and materials. Overall, though, North America has limited direct exposure, given the ongoing sanctions, but continued conflicts can amplify inflation pressure that can be felt worldwide.
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Since the financial crisis, major growth scares have been accompanied by drawdowns of roughly 14 to 20 per cent. All of these have been followed by strong rebounds averaging 24 to 30 per cent in the subsequent six to 12 months.
Past performance is no guarantee of future results, but the S&P 500 since 1945 has delivered an annualized return of 7.3 per cent, in line with the annualized growth in operating earnings per share. Over the long term, earnings are the most important predictor of market returns.
This does not mean we can be complacent with the challenges we face. But it does provide some perspective for investors on the current situation.
Rita Li is an investment adviser with RBC Dominion Securities, RBC Wealth Management.
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