- Money Morning Australia

How Will Investors React to a War in Syria?

Written on 28 August 2013 by Kris Sayce

How Will Investors React to a War in Syria?
Local investors stuck to the sidelines today amid global worries about an escalation of the conflict in Syria coupled with lingering expectations the Federal Reserve will soon cut its massive stimulus.‘ – The Age

If you follow us on Google+ you’ll know we’ve had a lot to say about the bloodthirsty clamour for war in Syria.

The Age says that investors are sitting on the sidelines waiting for news of a potential war in Syria.

We remember the beginning of the Iraq War in 2003. It coincided with the bottom of the market. George W Bush declared war…stocks took off, barely looking back for more than four years.

So, can investors read anything into the current bout of war mongering? We’ll give you our take now…

Last night the Dow Jones Industrial Average fell 170 points and the NASDAQ fell 2.2%. But the reality is that you can never be 100% certain how investors will react to certain news.

Proof of that has been the ‘good news is bad news’ and ‘bad news is good news’ market mentality of the past few years. (Although sometimes it has been ‘good news is good news and bad news is better news!’)

Now, some will say that it’s somewhat distasteful to think about investing in the context of war. But heck, you can’t put your head in the sand and pretend it’s not happening. By not doing something you’re effectively taking an investment position, so doing something about it isn’t that much different.

As we see it, it all adds to our reasons for not having too much exposure to the stock market. If another war has a negative impact on stocks you need to make sure you don’t have too much of your wealth tied up in the market.

On the other hand, if the past few years have taught you anything, it’s that investors are a plucky bunch who have a habit of brushing aside perceived problems…

If in Doubt, Blame Greece

Look at the following chart of the S&P/ASX 200 index:

Source: Google Finance

Since stocks bottomed in March 2009 the ASX has gained 63.5%. That’s an average annual gain of 14.1%. Although we will acknowledge that three-quarters of that gain came within six months of the market bottom.

Even so, with everything that has happened since then, only the grouchiest of bears could say the market’s performance hasn’t been impressive.

We can’t even remember the entire roll call of problems that have hit the market over the past five years…

Portugal, Ireland, Italy, Greece, Spain, Greece, Dubai, US debt ceiling, Greece, China, Japan, Greece, QEI, QEII, Greece, Operation Twist, Greece, the Sequester…Greece.

That’s not to mention all the problems around the European Central Bank and its various debt programs. Oh, and let’s not forget Cyprus…which in a way is connected to Greece too.

Blame the Greeks. They’re as good a scapegoat as anyone.

Despite all that, the Australian stock market is 63.5% higher than it was in March 2009. Anyone who missed out on those gains because they focused on all the negatives mentioned above (plus the ones we’ve forgotten about) must surely be kicking themselves.

US Consumers Looking on the Bright Side

This is exactly what we mean when we say it’s hard to know how the market and investors will react to certain events.

So far, despite a lot of volatility, the overall response by investors has been positive. Only time will tell if investors will keep feeling that way. But if this report from Bloomberg is any indication, the good times for markets may not be over yet…despite last night’s action:

The U.S. is weathering federal budget cuts and higher payroll taxes, growth is picking up and some economists predict the expansion, now in its fifth year, may last longer than most.

The signs of resilience are everywhere: Households continue to spend. Businesses are investing and hiring. Home sales are rebounding, and the automobile industry is surging. Banks have healthier balance sheets, and credit is easing. All this coincides with the economy shedding the excesses of the past, such as unmanageable levels of consumer and corporate debt.

Don’t worry, we’re not falling for all that spin hook, line and sinker. For a start, according to the Federal Reserve Bank of St Louis, while US household debt to GDP is much lower than it was four years ago, in dollar terms it has only fallen from around USD$14 trillion to USD$13 trillion.

So we would hardly call that ‘shedding the excesses of the past‘.

But what we think about that doesn’t matter. What’s important is to understand what others think and how they may react.

Right now, with the market poised as it is, our sense is that investors are looking for any excuse to keep buying the market. Whether they will or not is another story. Remember, the market never rises or falls in a straight line.

But as things stand, even another war in the Middle East may not be enough to knock the market from its upward trend. The US indices fell last night, but they fell just before the Iraq War started too.

For stocks, it could be 2003 all over again.

We’ll see.


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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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