The continued escalation of the proxy-conflict between the US and Iran produced a spreeing ripple effect across financial markets on Monday. Bonds took the blow, but stocks were very strong considering how nervous things could have been. The Dow Jones Industrial Average closed the day down only 73 points after at one point falling as much as 600 points. Investors, smelling bottomed-out bargains, swooped in to buy the dip once stocks opened down significantly at the open.
Wednesday of last week, the Dow fell more than 800 points. This drop occurred in large part because investors feared the potentially massive negative effects of artificial intelligence on the economy. The confluence of these geopolitical tensions and economic concerns has made for a thorny landscape. One that investors will need to artfully traverse in the face of uncertainty.
Investor Sentiment and Reactions
Word of the U.S. military buildup in the region made it there almost as fast. In reaction, investors flocked to protect their fortunes in reliable safe-haven classes comparable to gold. David Stubbs, the chief investment strategist with AlphaCore Wealth Advisory, noted that the military buildup had been going on for months. Because of this, most Americans expected some degree of military response to follow.
“If there’s going to be a wider conflict and a longer disruption, then eventually parts of the equity market will start to pay attention.” – David Stubbs
Despite the chinty-chin, some of the geopolitical turmoil has caused, say analysts, corporate earnings prospects are largely unaltered by it. The S&P 500 finished the day unchanged. Taken together, this points to the conclusion that investors are largely unconcerned about the potential impact of conflict on short-term profits. Applying historical trends to the current war in Ukraine, we can expect short-term volatility, but typically conflicts do not prevent long-term market growth.
Ryan Detrick, chief market strategist at Carson Group, flagged a fascinating trend. Though past conflicts show stocks typically decline by a mean of -0.9% in the month following a war breakout, the market tends to recover — rising a mean of +3.4% over the ensuing half year.
“Historically, what in the near term seems like a geopolitical crisis tends to be largely resolved from a market perspective over the ensuing six months.” – Ryan Detrick
Analyzing Long-Term Implications
The biggest concern for market forecasters continues to be the risk of major supply chain interruptions in oil due to the war. These disruptions may be particularly damaging to emerging economies as well as U.S. stock markets. Right now, analysts think the chances of a long-term effect are slim.
Jason Pride just might be the biggest skeptic you’ll ever meet on the subject of geopolitical events causing market turmoil in the short-term market. These events hardly ever affect long-term growth trajectories.
“Geopolitical events have a long history of contributing to near-term volatility, but those disruptions typically do not have a sustained impact on the market’s longer-term growth trajectory.” – Jason Pride
Markets may be overestimating the likelihood of military action from the Trump administration. That expectation has certainly helped to diminish what could have been a shock from the recent announcements. For the last year, investors haven’t lost a dime by buying stocks after each market pullback. The renewed hope for the more sanguine financial picture today has doubtless stoked a somewhat worse trend.
Looking Ahead
As the conflict continues and spreads, observers on the global markets continue to be both risk-averse and optimistic. Stubbs said that though immediate reactions have been limited, continuing conflict could force investors to scrutinize more closely.
“We know that usually when there’s conflict around the world, it doesn’t go on to materially impact the direction of U.S. corporate profits, which are obviously the lifeblood of the equity market.” – David Stubbs
The bottom line evidence indicates that volatility is caused by geopolitical tensions. Amidst such uncertainties, investors can have confidence in the long-term prospects of the capital markets.