On Wednesday night, President Barack Obama announced an expansion of the campaign against the Islamic State in Iraq and Syria with targeted airstrikes in Syria. And as we have seen so many times over the past 10 years, the financial markets responded with a big yawn as if to say that, financially, nobody really cares.
(See also: Advisers and investors take new military action in stride)
Are investors being complacent or realistic?
My theory on geopolitical news is twofold. First, reaction depends on how solid a footing the markets are on.
Cherry-picking with the benefit of hindsight, let's look at what happened in July 2006 when Israel and Lebanon were involved in an armed conflict. Stocks peaked in early May and sold off roughly 10% to their momentum low in mid-June before the fighting ever began. After a feeble market bounce, the news out of the Middle East took a turn for the worse in mid-July and stocks sold off again with the strong tail wind of poor market underpinnings. Today, we have many of the major stock market indexes close to all-time highs on solid but not great footing, very different from a market that is already in decline.
The second way I form an opinion on market impact from geopolitical news is to take a worst-case scenario and see what economic impact it might have. If Russia fully invaded Ukraine and then began to march into Belarus or elsewhere, the worst-case scenario would be a return to a Soviet Union-style dictatorship with a very large and resource-rich economy, as well as a modern-day Cold War with the West. That would likely cause global markets to become unglued for a long period of time.
(Don't miss: Dan Fuss: Risk in geopolitics, high-yield, leveraged funds)
The worst case in Syria and/or Iraq with airstrikes and even limited troop involvement does not move the needle for our economy, let alone the global economy. Similarly to when Syrian President Bashar al-Assad used chemical weapons on his own people — certainly a horrific worst-case scenario — global markets did not respond negatively for longer than a few hours, as there was not going to be any impact on the global economy.
From my seat, investors responded appropriately and realistically to the president's speech Wednesday night. Complacency is already in our stock market, judging from the extreme level of bullishness in the various sentiment surveys, but sentiment alone does not usually have a direct impact on stocks. There is usually a catalyst first.
Paul Schatz is president of Heritage Capital.
