Conflict and the Markets

Last week saw more than “saber rattling” with the significant world events taking place in Iraq. We saw entire cities taken by force there.

International events of this nature don’t require examination in your Weekly Update. However, the impact of military action on the markets is certainly a worthy subject and we’ve had clients asking our views.

So while we agree with Warren Buffet who says, “The future is unknowable”, we temper that knowledge with the facts of the past. We think you’ll appreciate a look back at markets in times of military action—whether or not U.S. action takes place over the weeks and months ahead.

Best always,
Lee and Jeremy


This Week’s Quote:

“The best weapon against an enemy is another enemy”
― Friedrich Nietzsche


JL Davis Thoughts This Week:

Whoever coined the term “War is Hell” was undoubtedly right. The untold pain and misery to human beings from armed conflict will forever be a tragedy.

With recent developments in the Middle East, including the continuing civil war in Syria, the newly announced partnership of Hamas with the Palestinian Authority, and now the fall of significant territories to Al-Qaeda aligned insurgents in Iraq, the U.S. appears to be under pressure to respond militarily in some fashion.

Past military incursions, conflicts and wars in the Middle East might provide insight into potential market reactions, though we hasten to add there is no certainty. Here are a few examples over recent decades:

Operation Desert Storm in early 1991 saw the S&P 500 index fall almost 5% and oil prices leap over 12% in just the two weeks prior to Congressional approval. January 17, 1991, the day after the U.S. launched the air campaign in Iraq, saw one of the largest one-day drops in oil prices in history. That day, oil prices plummeted 33% . The S&P 500 gained 3.7%.

In March of 2003 when fighting began in Iraq, oil prices rose some 40% in just over 3 months, from $18 to $25 a barrel (Monday of this week, it was $106). The S&P 500 fell 11% during the same period. After President Bush issued his final ultimatum to Saddam Hussein just two weeks later, oil plunged 24% and the S&P rebounded 8%.

Fast forward to the U.S. intervention in the Libyan civil war in March of 2011 and we see stocks fall some 5% while oil climbed 12%. Once fighting started, stocks rose some 4% by the end of the first month.

Dizzy yet? We could go on with many other examples (sadly so) but the message is often the same. Volatility—wide market swings driven by investor behavior and attitudes.

As long term investors, we believe that these swings can potentially create buying opportunities for the wise. Those with ready cash to invest for the long haul might be able to buy lower than they otherwise would.

Investors who routinely put money into stock based accounts (including 401k plans and the like) can also benefit, since lower prices mean more shares of the mutual funds they are investing in. Later, as share prices again rise, more shares can mean more profit.

It will be interesting to see how the future unfolds for the U.S. and the world as the perennial conflict in the Middle East dominates the news cycle yet again**

Lee & Jeremy

http://money.cnn.com/2013/09/03/investing/war-syria-stocks-oil/
http://www.moneyshow.com/articles.asp?aid=DAYTRADERS-32357
http://www.mcoscillator.com/learning_center/kb/special_market_reports/wars_disasters_and_their_impact_on_the_market/
http://www.marketwatch.com/story/oil-prices-extend-gains-on-ongoing-iraq-fighting-2014-06-16
http://www.brainyquote.com/quotes/topics/topic_war.html


Market Week: June 16, 2014

The Markets
Equities took a break across the board from their recent upward surge. After fresh all-time record closes early in the week, both the S&P 500 and the Dow Industrials saw profit-taking that also returned the small caps of the Russell 2000 to negative territory for the year. Renewed conflict in Iraq contributed to equities' swoon, raising concerns about global oil supplies and pushing oil to roughly $107 a barrel.


Last Week's Headlines
• U.S. retail sales rose 0.3% in May and were 4.3% higher than a year earlier. The Department of Commerce said the biggest increases were seen at auto and auto parts dealers, building/garden supplies stores, and miscellaneous store retailers such as florists, office suppliers, and used-merchandise stores.
• Wholesale prices fell 0.2% in May, leaving the wholesale inflation rate for the last 12 months at 2%. According to the Bureau of Labor Statistics, that's down slightly from the previous month, but substantially higher than the 1% of last May. The decline in prices at the final stage of wholesale distribution was evenly split between goods and services. Inflation is one of the measures being watched by the Federal Reserve as it unwinds its bond-buying efforts.
• The World Bank cut its estimate of 2014 global economic growth to 2.8% rather than the 3.2% it predicted in January. The Global Economic Prospects report said developing countries have been especially hurt by bad weather in the United States, a slowing housing market in China, political conflicts, and slow progress on structural economic reform; the report sees emerging-market growth at 4.8% this year rather than 5.3%. However, 2015 is expected to be better, with a 3.4% global growth rate and 5.4% growth in the developing economies.


Eye on the Week Ahead

The Fed is expected to once again reduce its monthly bond purchases, and options expiration at the end of the week could mean volatility as traders on the wrong side of equities' recent surge attempt to manage those positions. U.S. manufacturing data and the state of the oil market also could influence the mood of the markets.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.


Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014