Last night, President Obama announced an expansion of the campaign against ISIS with targeted airstrikes in Syria. And as we have seen so many times over the past 10 years, the financial markets responded with a big yawn as if to say that, financially, nobody really cares.
Are investors being complacent or realistic?
My theory on geopolitical news is twofold. First, reaction depends on how solid a footing the markets are on. Cherry picking with the benefit of hindsight, in July 2006, for example, Israel and Lebanon were involved in armed conflict. Stocks peaked in early May and sold off roughly 10% to their momentum low in mid June before the fighting ever began. After a feeble market bounce, the news out of the Middle East took a turn for the worse in mid July and stocks sold off again with the strong tailwind of poor market underpinnings. Today, we have many of the major stock market indices close to all time highs on solid but not great footing, very different from a market that is already in decline.
The second way I form an opinion on market impact from geopolitical news is to take a worst case scenario and see what economic impact it might have. If Russia fully invaded Ukraine and then began to march into Belarus or elsewhere, the worst case scenario would be a return to a Soviet Union style dictatorship from a very large and resource rich economy as well as a modern day Cold War with the West. That would likely cause global markets to become unglued for a long period of time.
The worst case in Syria and/or Iraq with airstrikes and even limited group troops does not move the needle for our economy, let alone the global economy. Similar to when Assad used chemical weapons on his own people, certainly a horrific worst case scenario, global markets did not respond negatively for more than a few hours as there was not going to be any impact on the global economy.
From my seat, investors responded appropriately and realistically to the president’s speech last night. Complacency is already in our stock market judging from the extreme level of bullishness in the various sentiment surveys, but sentiment alone does not usually have a direct impact on stocks. There is usually a catalyst first.
If you would like to be notified by email when a new post is made here, please sign up, HERE.
