Are this week's geopolitical headlines noise or news for investors? Photo by SeongJoon Cho/Bloomberg/Getty Images.
2016 isn't off to the smoothest start in stock market history, to put it rather gently. The first day of the year, global markets fell -1.9%. And, after a flat Tuesday, world stocks sold off again on Wednesday. As we counseled earlier this week, a down start to the year (first day, first five, first month) isn't indicative of how the year goes. But still, some suggest there are ominous reasons why stocks are selling off-and they aren't just China. Many wag an accusatory finger at rising geopolitical tensions; frayed relations between Saudi Arabia and Iran; and North Korea, which may or may not have succeeded in detonating a Hydrogen bomb.[i] All this plus ISIS and terrorism fears may have folks wondering: If tensions are elevated globally-if the world isn't a safe place-why own stocks? Answer: Because the world is virtually never a safe place, and tensions, war, pestilence and disease rarely affect markets materially. If owning stocks is consistent with your goals and objectives, now is as good a time as ever to own them.
First, to recap the goings on: Monday, Saudi Arabia cut off diplomatic relations with Iran after its embassy in Tehran was overrun by Iranians protesting the Saudi execution of a prominent cleric, spurring a rift between Sunni nations like Saudi Arabia and Shiite ones like Iran. Middle East tensions were already running hot[ii], given Syria's Civil War and ISIS. Many fear this only makes matters worse. Wednesday, seismographs detected an earthquake in North Korea, which the government claimed was caused by a nuclear test-the first successful test of a hydrogen bomb. If true, this would mark: a) a violation of international law preventing such nuclear tests and b) a significant step forward for North Korea's nuclear program, as H-bombs (thermonuclear weapons) are significantly more powerful than A-bombs (plain old nukes).[iii]
As we have written in this space often, geopolitics just aren't the massive threat to equities many presume. In the 90-ish years of history for which we have good stock market data, only once did war materially impact market cycles. That once is World War II, when recovery from the Fed-induced 1937-1938 bear was truncated by Hitler's aggression, and particularly France's shockingly fast defeat after the Nazis drove around their defenses.[iv] Dodgier data from 1914 - 1918 that we have less confidence in suggests World War I had a similar impact.
But with these two extremes as exceptions, there isn't much history of geopolitical events impacting stocks. Some have caused short-term volatility, like North Korea's 1950 invasion of South Korea, which coincides with the start of a -14% S&P 500 correction. But that lasted only a month, and stocks regained pre-invasion levels by September's end. Russia frequently crushed uprisings in Eastern Europe during the 1950s, but stocks barely noticed. The Vietnam War, obviously a milestone event in American and Vietnamese history, had no discernible market impact. The Cuban Missile Crisis caused a brief blip. Both Iraq Wars did likewise. 9/11 didn't sway stocks for long, either. The Iran/Iraq War didn't much move markets. Ditto the Bosnian War, Rwanda, Sudan, the Congo and more. The Madrid train bombing, London's 7/7 attacks, 2013's Boston Marathon bombing, Charlie Hedbo and last fall's Paris attacks. These are all huge historical events, many of which carry a significant human toll. But markets are cold-hearted-none of these issues affected them materially, because to materially knock stocks, events must have the power to greatly impact world commerce. Regional conflicts lack that.
Waiting for peace to break out is too idealistic a stance for investors who need equity-like returns to reach their goals and needs. At virtually any point in market history, tensions are running high somewhere, and folks are frequently fighting. Even in the huge 1990s bull, peace didn't rule the day. The US bombed Baghdad on January 17, 1991, just over three months after the stellar 1990s bull market was born. About three weeks later, the Irish Republican Army fired three mortar rounds at 10 Downing Street while then-British Prime Minister John Major was inside, meeting with his war cabinet. That August, the USSR entered the final throes of its collapse after a failed coup. The next year, the Bosnian War erupted, with many fearing the Balkans-Europe's powder keg-would explode in a wider conflict. (Fighting continued until 1995, triggering a massive flow of refugees north and west, not dissimilar in scope to the Syrian refugees presently.) In 1993, the Somali Civil War raged, and Western troops were sent to intervene, a fact arguably best remembered today for inspiring the 2001 film, Black Hawk Down. Russia again took headlines for instability that fall, when a constitutional crisis led to military action-an effort by deposed Communists to oust Boris Yeltsin and re-establish control. North Korean founder Kim Il Sung died in 1994, ushering in Kim Jong Il's regime and triggering uncertainty. In 1995, Japanese terror group Aum Shinrikyo attacked train commuters in Tokyo with Sarin gas. The next year, Al Qaeda's attacks on the US began with the bombings of embassies in Africa. We could go on, but we figure you get the drift-there is literally always some sort of conflict, strife or tension afoot.
Through all the aforementioned turmoil, stocks churned higher, with the bull market finally reaching its zenith in 2000-a peak unrelated whatsoever to geopolitics. This bull market, too, has churned through its fair share of strife. Many terrorist attacks. Russia's adventures in Crimea and Ukraine. Turkish tensions with Israel. The fight against ISIS. The Arab Spring. The Libyan Civil War. Egypt. A Thai coup. Israeli tensions with Iran. There are too many incidents to count. North Korea isn't new to headlines in this cycle either, as Exhibit 1 shows.
Exhibit 1: North Korean Aggression and Stocks, 3/9/2009 - 1/5/2016
Source: FactSet, BBC, as of 1/6/2016.
History, both recent and distant, suggests current geopolitical issues would have to spiral to World War III proportions-a scale sufficient to squelch trillions in global economic activity-to quash a bull market. We see little reason to think recent developments are anything near that scale. It is inevitable that geopolitics will garner a ton of media attention. But for investors, it is much more often a distraction than a true threat.
[i] They say they did, but most analysts in the developed world are skeptical.
[ii] You could have written this phrase at any point since 1948. Sad but true.
[iii] Presently, Western observers note the seismic readings don't differ from earlier A-bomb tests. More data is expected in the next 48 - 72 hours that may shed more light.
[iv] The Maginot Line was sooooooo 1871, hence its failure in 1940.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.