When it comes to trading stocks it's common for traders and analysts to look around at geopolitics, gold, interest rates to get a feel for the future of stock price trends. What have stock prices done in the past in advent of war, or in light of price trends in gold, and/or price trends in interest rates? What about inflation? Are stock price trends affected by exogenous forces at all?
Everything we need to know about stock prices, past, present and future, and their behavior in and round wars, or relative to changes in interest rates, inflation, or changes in the price of gold, can be observed in my favorite, and almost only trading tool: Price charts.
Stocks vs. War
Is war good, bad, or indifferent for stocks? Forget the rhetoric, the pontifications, the rationalizations, the intellectual ramblings and let's simply look at a chart of the Dow vs. every major war of the past 100 years:
The shaded areas on the chart above identify the performance of the Dow Jones Industrial Average against the four major wars of the past 100 years: WWI, WWII, Vietnam War and the post-2001 War On Terror. During each of the first three wars the Dow went into a sideways trend with minor cycles up and down within the trend. What is remarkable about these periods is that at the end of each war, at the end of each corresponding sideways trend, there was a multi-year bull market, some of substantial size.
Note that the graphic above ends in 2009, which was the end of the financial market crash and the beginning of current 8 years and running, bull market. One might argue that based upon historical patterns that would suggest either a break in the pattern or the end of the, "War On Terror." Especially in light of the events of the past few days the War on Terror is far from over. So how does the bull market of the past eight years fit into pattern of the wars accompanied by sideways trends?
First, consider whether the "War on Terror" can be grouped with the previous three wars at all. It is not the kind of fighting war as was WWI, WWII and Vietnam. Second, this war is ongoing, and the verdict is still out as to where the Dow might be by the time this war ends, if it ever does end as there appears no light at the end of the global terror tunnel. A retracement of the entire 8-year rally over the course of this less than orthodox world war would fit the pattern on a longer term scale. In other words, the jury is still out on this fourth war, if it even fits with our definition of war. Calling anything a war, doesn't make it war, especially against unidentifiable geography with an invisible army.
War in Afghanistan
Not shown on the above chart is the War in Afghanistan which started in arguably with 9/11 and is widely considered to have ended in 2014. The chart below reveals a breakout above the 2007 highs at the end of 2013 and from there a near vertical rally since, a pattern consistent with the more traditional first three wars of WWI, WWII and the Vietnam War. Whatever we make of the "War on Terror", it is WWI, WWI, Vietnam and Afghanistan that all follow the same pattern: Sideways, followed by a breakout higher near or right after the end of the wars.
Stocks vs. Gold
What does the price trend in gold tell us about the trend in stocks? Again, we turn to the charts, both long term and short term:
As is illustrated in the charts above, the two asset classes move independently from each other. Over the 8-year period covered in the chart, gold spent approximately half the time going up, and half the time going down, while stocks, represented by the Dow, just went up.
The two charts below zoom in on just 2016-2017 and reveal just about the same random relationship, illustrated as a fractal of the longer-term trends set out in longer term charts above. Here again, gold cycles in Up-Down-Up trends, while the Dow only had one direction on its mind: Up.
Throwing interest rates (10-Year Treasury Yield) into the mix we get even more divergences with rates over the past year in Down-Up-Sideways trends, versus the Up-Down-Up trends of gold and the Up-Up-Up trend of stocks. Five charts, one conclusion, price direction of gold and interest rates have little if any effect on the price direction of stocks.
Summary & Conclusion
(1) What does the advent of war tells about the future trend in stocks? Mostly sideways, then rally post-war;
(2) What does the trend of the price of gold tell us about the future trends of stocks? Nothing;
(3) What does the trend in interest rates tell us about the future trend in stocks? Nothing.
What, if anything, determines the general direction of the stock market?
I will explore that answer in the weeks to come.
Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.