Could Syria Really Sink The Stock Market?

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 |  Includes: SPY
by: Lou Basenese

All eyes are on Syria – or I should say, Washington, D.C. – as we determine what our response will be to the tragic use of chemical weapons.

No doubt, a protracted military engagement would hamper our country’s efforts to (finally) get our finances in order. In turn, the ever-fragile economic recovery could be jeopardized. And that, my friends, has investors on edge.

How else do you explain this headline from the Financial Times – “Traders Cautious As Syria Fears Re-emerge”?

Or the fact that Marketwatch.com – an investment-focused website, mind you – created an entire “Focus on Syria” section at the top of its homepage, as well as a page dedicated to “live streaming updates on the conflict in Syria.”

Should we really be fearful, though? Does Syria genuinely pose a threat to our investments?

Forget what I think on the matter. Instead, let’s stick to the cold, hard facts and see what the data tell us.

(Hint: It’s not what you might expect.)

Wall Street Doesn’t Care About War

As I’ve shared before, well-known uncertainties tend to be priced into the market already. And that’s certainly (pun-intended) the case with Syria.

The S&P 500 and Dow both dropped about 4% in August overall. Yet a good chunk of the declines came in the latter part of the month, once news broke about Syrian President Bashar al-Assad’s heinous acts.

In essence, after about a 2% decline, we’ve already absorbed the full impact of Syria in the stock market. So any fears about further declines are completely overblown.

Or as The Wall Street Journal’s Michael J. Casey says, “No U.S. military engagement has had a measurable impact on non-commodity markets.” Indeed!

While that might sound a tad insensitive, it’s nevertheless true. Wall Street doesn’t really care about war. Consider the data…

Birinyi Associates conducted a study on limited U.S. military interventions overseas (bombing campaigns with no ground troops) over the last 20 years. The results? In four out of five instances, the S&P 500 Index sold off for a two-week period prior to any engagement. Within a month’s time, however, the market not only recovered the losses, it traded even higher.

The lone exception came in 1998, during Operation Infinite Reach in Afghanistan and Sudan. But the market was also digesting a major currency crisis in emerging markets. Of course, everyone remembers the currency crisis – not the military situation.

Meanwhile, Sam Stovall, Chief Equity Strategist at S&P Capital IQ, conducted a study of 14 military engagements, spanning 70 years. And he arrived at the same conclusion. Stocks initially sell off, but quickly bounce back to recover any losses.

So chill out, no matter how many times you read an ominous financial headline about Syria and the stock market.

How to Really Tell When it’s Time to Panic

If you’re interested in discerning when the stock market is really in jeopardy, look to movements in U.S. Treasury bond prices and the dollar. They’ll move higher in tandem, as investors seek liquidity and safety above all else.

As Casey notes, that’s precisely what happened “after the collapse of Lehman Brothers, during the worst moments of the euro crisis, and even after Standard & Poor’s stripped the U.S. of its triple-A credit rating.”

But right now, it’s not happening. The dollar is strengthening, while U.S. Treasury prices keep falling.

Bottom line: It’s highly unlikely that any limited military engagement in Syria will crash the stock market. Or as Stovall says, “Some think the impending military response to Syria’s use of chemical weapons will trigger a market shock… If so, it would probably be one of the most anticipated of unanticipated events in modern history.”

So treat the dip as a buying opportunity, not a reason to sell. It’s the right move to make. And that’s a fact based on the data, not simply my opinion.