After taking into account past experience, the currently high valuations of the S&P 500, which remain elevated even after recent declines, show that a prolonged bear market is likely in the near future. Moreover, the Russian invasion of Ukraine may guarantee it.
Iraq invaded Kuwait more than 30 years ago in 1990 and defeated it within days. Even though Kuwait’s population was much smaller than Ukraine’s know, Kuwait’s invasion by Saddam Hussein was an affront to NATO and OPEC countries. Besides, the country didn’t rank among the top 10 global energy producers. Nevertheless, the S&P 500 fell 16%, and the Nasdaq Composite index dropped 25%, as oil jumped to $46 from $28 a barrel by mid-October of 1990.
The ongoing situation in Ukraine also represents an affront to NATO and geopolitical stability. The war could significantly impact energy markets, as Russia is the third-largest energy producer globally. The factors mentioned above translate into economic uncertainty and market disruption, as we saw more than 30 years ago. In fact, the Nasdaq Composite index briefly entered a bear market trajectory last week. Meanwhile, the Dow and the S&P 500 were in a correction as of Friday’s close.
Bear market and investors
However, the Kuwait invasion was met with one of the swiftest military resolutions in history. Colation forces liberated the country in February of 1991.
Nevertheless, the path to a quick resolution appears elusive if not improbable when it comes to Ukraine. Sanctions on Russia may result in an economic backlash against the West. The prospect of an “economic war” becoming a real one is of even greater concern.
Barring that, nevertheless, the trajectory may be market malaise without relief. Instead of the markets bottoming out in 70 days and then rallying, as markets did after the invasion of Kuwait, investors might need to expect months or even several years of challenges to geopolitical stability as well as market sentiment. Some people would argue that a strong economy and improving earnings will limit market declines.
However, history shows that when the S&P 500 was priced at 22 times trading earnings, as it is, stocks entered a bear market most of the time.
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