The S&P 500 is up by over 17% year-to-date on price return basis. In the past 5 year, the index has had an annualized return of 10.52% which is very good. Though equity markets are soaring after a brief lull for the past few months it is always important to keep an eye on the other direction of bull markets. Investors are prone to irrational exuberance and bid up equities to astronomical levels like there is no tomorrow. This year is no different. For instance, semiconductor stocks are in the stratosphere and still going higher. Software stocks are not far behind. From EVs and renewable energies investors have turned their attention to the tech sector and many stocks have soared 50% or more in that sector. It is always a wise idea to be aware of what happens when markets turn their direction.

With that said, the below chart shows the largest real declines in US markets. The 20% decline during the Covid-19 panic feels like nothing as markets have recovered strongly since then.

Click to enlarge

Source: MorningStar via Bogleheads

Related ETFs:

1. SPDR S&P 500 ETF (SPY)
2. iShares Core S&P 500 ETF (IVV)
3. Vanguard S&P 500 ETF(VOO)
4. SPDR Portfolio S&P 500 ETF (SPLG)

Disclosure: No positions

I have written many times in the past on the impact geopolitical crises on equity markets. The overwhelming research shows that markets are more driven by other factors such as earnings, interest rates, inflation, recession, etc. than crisis events. You can find some of the past posts here and here and here and here. Recently while researching on this topic I came across another article at BMO where the authors came to the same conclusion. The following is a brief excerpt from that piece:

Returning to the conflicts in the Middle East and Ukraine, we have long maintained that exogenous shocks tend not to have a long-lasting impact on the markets and that the economic cycle and interest rates are by far the most important drivers of financial asset returns. We stand by that view. Figure 3 shows the market impact of different military conflicts, and the results are clear: a negative initial reaction with a subsequent recovery in the vast majority of cases. Going back to 1940, the median downdraft was 2% in the month leading up to the event, followed by a gain of 10% in the subsequent year.

Figure 3: Market Impact of Major Military Conflicts

Click to enlarge

Source: War and Higher Rates: A Volatile Mix, BMO

The key point to remember is that markets have the ability to sustain all types of external shocks and investors need to focus on their long-term goals and should not make knee-jerk reactions by liquidating a portfolio for instance.