What Happens When War Strikes?

Includes: SPY
by: Paulo Santos

The question is probably on the minds of a lot of traders and investors today: "What happens if the U.S. goes to war with Syria?" Such war is perfectly possible, as a reaction to the large chemical strike last week, graphically described in a detailed article today in the NYT.

President Obama had long said that chemical strikes were a line that Assad could not cross without prompting a reaction. Although there had already been several small such strikes, the past week's was massive, leading to as many as 1000 deaths including many women and children. At this point, military action by the U.S. is nearly certain even while facing opposition from Russia, a traditional Syria ally.

So what really happens when the shots begin to sound?

The market, for which the SPDR S&P 500 (NYSEARCA:SPY) is a proxy, is really scared. Not only did it drop nearly 0.5% yesterday when the first rumors of war started sounding, but it's adding a further 1% drop today.

Is such a worry warranted? We have two historical examples to draw from:

  • The first Iraqi war, where hostilities began on January 17 1991;
  • And the second Iraqi war, where hostilities began on March 20 2003.

This is what happened in the S&P500 in each of these wars (Source: Yahoo Finance)

First Iraq war (starting January 17 1991)

Second Iraq war (starting March 20 2003)

As we can see, both of these wars share similarities. There is weakness right before hostilities break out. Then there's a significant rally as hostilities begin. Indeed, in the second Iraq war it even seems that the market anticipates (by days) the beginning of the hostilities.

This pattern has been known to repeat throughout history

The pattern we saw above has been known to repeat throughout history. It's not a coincidence that financier Nathan Rothschild had a saying which went like this: "Buy on the sound of cannons; Sell on the sound of trumpets."

There is thus a lesson to take from the present events. While weakness is to be expected going into the war itself, as soon as the U.S. strikes it's likely that the stock market will rally. In this case, the strike should come quickly and through the use of either air power or cruise missiles.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.