My pals at Ned Davis Research (NDR) provided a reminder about how the markets respond well to crisis events. I’m not sure the latest phase of the decline that began in mid-May was necessarily triggered by the Mideast crisis but I think the blow-up in Lebanon does qualify as a crisis event.
NDR has identified 41 crisis beginning with the closing of the Exchange during WWI. The crisis events range in length from days to months but most have been anywhere form one day to a few weeks. On average, during the crisis phase, the DJIUA fell 5.7% with a media decline of 2.9%. A large percentage of the crisis events were related to wars and other foreign incidents. About 1/3rd of the crisis events directly involve either the Mideast or terrorism. The most severe declines among those crisis events were the 1973 Oil Embargo (-18.5%), Iraq Invading Kuwait (-13.3%) and 9/11 (-14.3%). Several events inthis group led to little or no negative reaction including the 1983 Beirut bombing, the 1956 Suez Canal Crisis preceding the 1956 Arab-Israeli War, the U.S. bombing of Libya in 1986, the start of the Gulf War in 1991 and several of the “lesser” recent terror attacks like the USS Cole, the Bali nightclub, and the London Train bombings.
Of equal interest to the generally negative reaction to crisis events as they happen is that the associated market decline has historically put in a near-term bottom for stock prices…..

In the 22 days following the end of a crisis event, the DJIA gains an average of 4.2%, the 63 day average return is 5.2%, the 126 day average is 8.9%, and the 253 day average return is 14.9%. It is worth pointing out that the standard deviation around those averages looks pretty high to my eyeballs although the median returns are quite close to the averages.
So apparently, crisis events can be a positive catalyst. Whether the current situation in the Mid-East qualifies is open to be debate. And I think you have to say that the current crisis remains ongoing so the rally off Tuesday’s may not qualify in the end as part of the post-crisis period.
Nevertheless, I think this data reminds us that it is always bleakest at the bottom. So resisting the urge to throw in the towel when the pain in your gut reaches a new intensity remains very good advice.
If you want a copy of the spreadsheet with the data on each crisis event, please email or comment below.