With concerns that renewed conflict in Iraq could escalate, investors are reminded that we have been here before. Since 1992, the US has been involved in two major Iraqi conflicts, as well as a troop ‘surge’ in 2007. Investors may look to the 6 months following escalation (defined here as a surge in boots on the ground) for clues as to how an escalation may play out this time:
- In the six months following Iraq 1, Iraq 2, and the 2007 troop surge, the S&P 500 returned 1.54% a month on average, compared with .79% a month on average for the November 1986 – May 2014 period, excluding the 18 months above.
- Small capitalization, more volatile stocks tended to outperform
- Trend following strategies and high quality/efficiency firms tended to underperform.
- In only 5 of the 18 months surround troop build-ups was the S&P 500 return negative.
- The story is similar in the UK, with UK stocks outperforming during the first six month of a build-up, and with smaller more volatile names outperforming
Source: S&P Capital IQ Alpha Factor Library and S&P Capital IQ Quantamental Research