USA TODAY International Edition
STOCKS OFTEN REBOUND AFTER SHOTS ARE FIRED
What history has to say
When the U. S. military moves against rivals, the stock market’s initial reaction is to fall. But stock prices typically don’t stay down for long after the missiles are dropped, historical market data show.
Indeed, data compiled by three Wall Street firms that measure how stocks have reacted leading up to, and following, various types of U. S. military action, suggest that the market’s current hand- wringing over the USA’s expected strike at Syria might be short- lived.
Consider the historical record:
“Limited” military interventions. Since 1995 the U. S. has been involved in at least five military offenses that have parallels to the type of “limited” force the U. S. is said to be considering in Syria, according to data compiled by Birinyi Associates. The analysis includes Operation Desert Fox in Iraq in 1998, as well as strikes aimed at Serbia in 1999 and Muammar Gaddafi- led Libya in 2011.
The campaigns, largely bombings without the presence of ground troops, spooked investors in the two weeks prior to U. S. involvement, causing the Standard & Poor’s 500stock index to decline an average of 1%. But the broad index was up 2.8%, on average, a month after the onset of military operations.
Airstrikes since 1985. An analysis of 12 “significant” airstrikes since 1985 found that the S& P 500 suffered an average pullback of 5.9% from its prior three- month high, says David Bianco, chief U. S. equity strategist at Deutsche Bank. But stocks again bounced back quickly, rising an average 7% within a month of the low surrounding the first airstrike.
“Shocks” to the system. A review of 11 “market shocks” dating back to the attack on Pearl Harbor in 1941, and also including the 1962 Cuban Missile Crisis, the 9/ 11 terror attacks, the start of the second Iraq war in 2003 and the Japanese tsunami in 2011, also shows a short- lived negative market reaction.
The median decline the day after the “shock” was 1.5%, and the S& P 500 bottomed out four days later. The median number of days for the market to recover all of its 3.4% median decline was just 14 days, according to data provided by Sam Stovall, chief equity strategist at S& P Capital IQ. ( Median means that half were higher, half lower.)
So, why does the market have a habit of rebounding once the bullets start flying? Here are four theories.
1. Uncertainty over outcome lifts. Angst about all the things that can go wrong fade once the event occurs. “Potential military action is fraught with uncertainty. Will it hap- pen? When will it happen? What will the consequences be? Will they retaliate? How long will it last? Markets hate uncertainty,” says Bob Doll, chief equity strategist at Nuveen Asset Management. “Actual military action begins to answer some of those questions.”
2. Impact on economy minimal. If the military action doesn’t significantly increase the risk of a recession or cause a sharp decline in corporate earnings, the market’s odds of a fast recovery increase, says Ed Yardeni, chief investment officer at Yardeni Research. 3. Fears priced in in advance. “The market often has jitters ahead of military action because politicians paint a dire picture to justify the use of force, and there’s always the risk that the involvement is bigger than planned,” says Axel Merk, chief investment officer at Merk Investments. 4. History of U. S. success. “Confidence in U. S. victory” also plays into the recovery, adds Bianco.
Still, Bianco warns that if the “conflict escalates and the risks to U. S. interests rise, the market can react adversely.” For now, he says, Wall Street is assuming the conflict with Syria will remain “contained” and won’t “trigger further instability.”