Today the U.S. launched attacks on Syria. According to the Wall Street Journal the Pentagon has said that the strikes are the beginning of a longer campaign and not a one-time attack. Yesterday the market snapped its five day winning streak, and today it is down again.
What does a possible war mean for the market? The Economist has a recent piece that puts the international turmoil in perspective. While the human cost of the violence is terrible and should never be downplayed, it’s important to realize that global financial markets are remarkably resilient. The Economist says:
In a new book Henry Kissinger, the doyen of foreign-policy strategists, describes a world in which disorder threatens, and violence in Ukraine and the Middle East and tensions in the South China Sea vindicate him. In theory, after 20 years of global expansion, multinationals are more vulnerable than ever. Listed Western firms have 20-30% of their sales in emerging markets, about double the level in the mid-1990s. It is not just oilmen but tech wizards and sellers of fancy handbags who face political risk. It can range from currency instability, vindictive regulation, curbs on remitting cash back home and production disturbances to sanctions or even nationalisation.
Yet none of the recent geopolitical turmoil has had much impact on firms or financial markets. There have been yelps of pain. Carlsberg, Adidas, Société Générale and others have had share-price falls or made write-offs due to Russia. Overall Russian losses by Western firms amount to $35 billion, based on announced write-offs and the value of a basket of ten companies most exposed to Russia. But that is a drop in the multinational ocean. An index of political risk calculated by Dun & Bradstreet, an analysis firm, is at its highest level since 1994 (partly as a result of the euro-zone crisis). But the VIX index, which measures the implied volatility of America’s stock market, and is also known as the “fear gauge”, is near a 20-year low.
The article goes on to make the case that the Middle East is no longer as economically linked to the rest of the global economy now that the U.S. and other regions are producing more energy on their own.
While the developments in Syria and Iraq are certainly troubling, the Economist puts the situation in perspective, which can help investors avoid overreaction or panic.