Advisers and investors take new military action in stride

Day after Obama authorizes new round of air strikes in the Middle East, oil drops. What gives?
JUL 29, 2014
President Barack Obama's expanded military effort to destroy a militant force in Syria and Iraq came on the eve of the 13th anniversary of the Sept. 11, 2001 terror attacks. But the reaction of jaded investors couldn't have been more different. Mr. Obama's announcement that the U.S. would authorize the use of airstrikes in Syria and the deployment of military advisers in Iraq came as the Islamic State, a group also known as ISIL and ISIS, gained ground in the two Middle East countries that have already been the scene of years of war. In the past, similar announcements of military action weighed on financial markets. But on Thursday, markets took the dour news in stride. A widely used benchmark for crude oil futures climbed less than a percent. And yields on 10-year Treasuries, which move inversely to prices, ticked up about half a percent. The S&P 500 was down moderately, about 0.24%, while the small-company-tracking Russell 2000 index inched up 0.21% in midday trading. Many global stock markets remain near or at all-time highs. “It's something that's going to be a part of our defense strategy, and I think the markets are used to that,” said Tom Orecchio, an adviser at Modera Wealth Management in Westwood, N.J., which manages nearly $1.6 billion. He said clients have asked to take risk off the table at two major points in his 24-year career: in 2008, as markets tumbled globally, and to a lesser degree when the U.S. sent troops into Iraq on Mar. 19, 2003. “Geopolitics has impacted my clients' thinking and my clients' concerns, but I'm not so sure that it dramatically impacted my clients' returns,” Mr. Orecchio said. This time, despite the brutality of ISIS, people don't perceive militant groups as affecting global markets. “The simple, if mercenary, reason that U.S. stocks have shrugged off the crisis in Iraq and Syria is that ISIS isn't out to cut oil supplies,” Nicholas Colas, chief market strategist at ConvergEx Group, a New York-based brokerage firm, said in his daily market commentary. “The terror group, in fact, sells all it can produce from the wells it captures.” One other reason Mr. Obama's actions didn't rattle investors is that many have been moving to place assets in safe haven for the better part of the year as the Islamic State gained steam, Kiev waged a fight against implacable, Russia-aligned separatists in eastern Ukraine, and a half-dozen other crises simmered around the world. Investors have put $112.3 billion into mutual funds and exchange-traded products invested in intermediate and long-duration bond funds this year through Aug. 31, , according to BlackRock Inc., the world's largest money manager. Last year, they pulled $241.4 billion out of those funds, the firm says. The money flows are particularly striking because professional investors almost universally anticipate rising U.S. interest rates over the next several years. Rising rates could erode the value of those longer-term bond positions. “There is a desire to maintain some sort of an anchor to protect against the downside,” said Anthony Valeri, senior vice president of fixed-income research at LPL Financial, the largest independent broker-dealer. Yet many advisers are keeping their strategies steady. “We all know Wall Street loves certainty, and it's become all but certain what we have for the next two years,” said Doug Flynn, adviser at Flynn Zito Capital Management in Garden City, N.Y., which manages more than $300 million. “A lame-duck president combined with a do-nothing Congress sets up for a continuance of the fabulous governmental nothingness which, in turn, allows business to do what it does best for the next two years.”

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