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Investors tend to overreact to geopolitical events; Cuban Missile Crisis was buying opportunity

  • Andrew Garthwaite at Credit Suisse says the current North Korea tension is an opportunity for buyers.
  • The Cuban Missile Crisis was a similar situation, Garthwaite said.
  • Within nine days of the Cuban Missile Crisis, the market recovered all of its losses.
North Korean Leader Kim Jong Un looks on during the test-fire of inter-continental ballistic missile Hwasong-14 in this undated photo released by North Korea's Korean Central News Agency (KCNA) in Pyongyang, July, 4 2017.
KCNA | Reuters
North Korean Leader Kim Jong Un looks on during the test-fire of inter-continental ballistic missile Hwasong-14 in this undated photo released by North Korea's Korean Central News Agency (KCNA) in Pyongyang, July, 4 2017.

Last week's market drop on increasing tensions between the U.S. and North Korea, the second-worst weekly performance of the year by the S&P 500, was a great buying opportunity, based on a history of geopolitical events, said Credit Suisse.

"Geopolitical shocks tend to provide a buying opportunity, unless there is: an underlying economic slowdown, clear cut overvaluation or a monetary tightening," Andrew Garthwaite, the widely followed global equity strategist at the firm, wrote in a note at the end of last week.

Garthwaite cited the Cuban Missile Crisis as exemplifying this phenomenon, saying that the similar "but more serious" event sent the market down 7 percent before it recovered losses "within nine days."

A large geopolitical shock to the market also needs a sluggish economy accompanying it to have a notable effect, Garthwaite said. The first Gulf War sent the market down 17 percent. Garthwaite said it took 118 days to recover losses from the military shock due to the country then "entering a mild recession."

The S&P 500 fell 1.43 percent for the week, the most since the week of March 24.

Credit Suisse sees the S&P 500 rising about another 5 percent to 2,550 as it bounces back from this latest shock. Garthwaite said earnings around the world remaining better than expected is one of the reasons stocks will continue higher.