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EvanBuck (99.79)

THIS IS WAR.

Recs

10

August 28, 2013 – Comments (0) | RELATED TICKERS: VXX , XOM

Mr. Market had a pretty bad day on August 27th, 2013, and VXX (a common baseline volatility/fear index) soared.  Why, you may ask?  Well, the Obama administration is seemingly taking the steps necessary to deliver on its "red line" ultimatum in the embattled nation of Syria after an alleged chemical attack that killed thousands of people.  We are very likely going to be getting ourselves into another Middle Eastern conflict.  Regardless of where you stand on Syrian intervention, an important question should be raised:  Should investors be very concerned about Syria developments?  My absolutely emphatic answer to this question is: It depends. (#sarcasm)  I will, however, outline a couple of reasons why I personally believe investors shouldn't flee the stock market but as of now but "keep calm and trade on."  In the grand scheme of things, I highly doubt many will remember today's drop.

(Disclaimer) Please don't misunderstand me here.  I am not attempting to trivialize warfare in any way, shape, or form.  The intent of this article is to simply find out how investors could respond to the news about Syria.  As this post was written fairly quickly with my first thoughts on the issue, it is not intended to be an authoritative text but rather my "tummy feelings" about what is likely to happen in the upcoming weeks/months. 

Reason #1: The Market Has Self-Corrected in the Past

In an interesting piece on MarketWatch a few months back, Mark Hulbert analyzes what effect wars have had on the stock market and brings in some interesting historical data and studies.  I recommend reading over his short piece for full contextualization behind the reasoning of my argument.

While Hulbert does illustrate that one cannot paint with too broad of a brush with regards to war and the stock market, the general trend in modern times seems to be that war does cause a short-term drop in the market.  But in the long run, the market recovers.  I expect the same to be with Syria.  After the initial shock of today and probably the next few days or so, investors will most likely have acclimated to the new Syrian war, and volatility will decrease.  A similar trend can be seen in another "undeclared war:" Libya.  Instability in Libya caused the market to drop sharply, but then over the next few months the stock market roared back due to "success" (tongue planted firmly in cheek) in Libya and several other superceding factors...which is the perfect segue into my next point.

Reason #2: Macroeconomic Conditions Might Slow (but not Reverse) Growth

In a 2003 article in the Tapei Times, John Dorfman illustrated a very key point from looking both at the past and (at that time) the future in Iraq: the stock market's reaction to warfare must always be analyzed in the big picture and is largely dependent upon the success of the war itself.  Dorfman brings up two important historical examples: Vietnam and the First Gulf War in Iraq.  In both instances the market increased during the time span of the wars.  But, in the Vietnam war, the market lagged normal growth rates, while the market was buoyed higher by the quick success of the First Gulf War.

With Vietnam, a lot of other events and economic rumblings happened which further increased turmoil.  Fast forward to today.  The bull market has had a great run due to low interest rates, a recovering housing market, and other generally encouraging signs even in this anemic economy.  The Fed is still posturing over when exactly it will taper off its "easy money" quantitative easing policies even though interest rates are starting to tick up.  Gas prices have fallen as America is utilizing more of its natural resources.  Basically, macroeconomic conditions generally seem to not be BAD at this moment in time. If we don't succeed in Syria, then likely what will happen is that the market will still increase due to "good" news at home, but at a lower rate than normal.  All the more will market trends continue upward if we succeed in Syria.

Conclusion

The nature of Syria's affect on the market is at this point highly speculative and dependent on several other factors.  My outlook on the future of the market might completely thrown off if an unforseen factor swoops in, or macroeconomic conditions start becoming more bearish.  But, I personally think that today's drop will eventually be made up for.  Sometime, America will need to face the music if we don't reverse our outlandish spending policies.  (If you want a more in-depth explanation of my position on easy-money policies, please check out "Two Tragic Reasons Why Investors Love The Fed"). But I don't think that moment has come just yet, nor is it likely to come in the near future.

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