Weekly Market Commentary
When political or geopolitical events surface that may influence markets, analysts look at that event or events through a narrow prism—how might it affect investors? These might include an election, a debt-ceiling debate, a government shutdown, or something overseas.
The consequences of an election (for example) reverberate far beyond its impact on investments. However, we’re not political analysts, and we stick with what we know best.
Yet, it’s hard to be clinical and objective following the events unfolding in the Middle East.
Hamas, a designated terrorist group by the U.S. and European Union, launched an appalling, gut-wrenching, and completely unwarranted attack on Israeli citizens. Real emotions surface. Yet, our job is to analyze these events through that narrow prism.
Last week, stocks briefly sold off on Monday morning in the wake of what the Economist called the “bloodiest (day) in Israel’s history.” It was sell first, ask questions later.
But stocks rallied that day and the Dow and S&P 500 Index finished the week higher, as investors seemingly shrugged off the tragic attack. What gives?
Investors focus on one thing. Whether an event is homegrown or originates around the globe, the market attempts to put a price on its impact to the U.S. economy.
Oil rallied, pulled back, and rallied again on Friday. What’s happening in the Middle East has not had any discernible impact on oil output, but rising tensions have created volatility.
For now, investors seem to believe that violence will be contained without significantly affecting the U.S. economy and the stock market. Why? Possibly because geopolitical shocks have historically been short-lived as investor mindsets adjust.
While the 1973 Yom Kippur war led to the OPEC oil embargo, soaring oil prices, and a steep U.S. recession, it was an outlier. Today’s oil market is much different, geopolitical dynamics in the Middle East are different, and the U.S. is a leading oil producer.
A Look at the Past
While what happens in the past is no guarantee of future performance, reviewing 23 separate geopolitical events since Pearl Harbor, the average loss for the S&P 500 on the first day was 1.1%, with an average total pullback of 4.7% (simple return, excluding dividends reinvested), according to LPL Research.
On average, the bottom occurred in 19 days, with an average time to fully recover losses of 42 days. The most significant influence on 12-month returns following a surprise event was whether or not the U.S. economy slipped into a recession.
How oil prices respond could be the biggest input into an equation with many unknowns as how far the crisis may spread could significantly affect how oil prices respond.
Any short-term volatility (and the situation is fluid) will depend on whether the conflict is contained to Israel and Gaza.
As we conclude this week’s report, let us never forget that the human toll of last week’s brutal attack is immeasurable.