Things Happen

Within the last 24 hours, the Senate used the so-called nuclear option to end potential filibusters of presidential appointments. The US military fired 59 cruise missiles at an air base in Syria, responding to a chemical attack that killed dozens of Syrian civilians earlier this week. A stolen truck plowed into a Swedish department store, killing and injuring several, in what the prime minister called a likely terrorist act. Yet despite the chaos and uncertainty, stocks aren't plunging. As we write, the S&P 500 is bouncing mostly sideways on Friday morning, after a slightly positive Thursday. Not to read too much into short-term volatility (or a lack thereof), but we think this is a timely reminder: Stocks are unperturbed by apparent turmoil.

Armed conflict and terrorism are dreadful and tragic for those impacted directly. They destroy innocent lives and property, and our hearts are with those affected by this week's events. However, time and again, history has shown these localized events don't sink stocks. Sometimes they trigger volatility, sometimes they don't. But only major, global, prolonged conflict has ever caused a bear market. In 1938, the Nazis' annexation of Czech territory forced markets to start pricing in World War II, truncating a nascent bull market. Decades earlier, using spotty Dow data, there is strong evidence World War I's onset also caused a bear market. Those are the only two examples in history where stocks have clearly and forcefully responded to conflict, and rightfully so: Stocks ultimately care about future corporate profitability, and when war destroys (or stops or redirects) huge swaths of the global economy, it is fair to expect profits to slide. A lot. But if the conflict isn't global-and instead centered in a small region that doesn't contribute much to total global output or demand-then logically, there is no reason for it to cause a bear market. Terrible as it is for the immediate area, for companies globally, it probably isn't a factor. Hence, when there is strife in the world, and you wonder whether it's going to sink stocks, the best question to ask is always: Will this turn into World War III? The answer today is: Probably not. Some have speculated the attack could draw the ire of countries that have backed Assad, like Russia or Iran, and broaden the conflict, but that's wild speculation at this point.

As for the "nuclear option," where Senate Republicans changed the chamber's rules in order to facilitate the confirmation of Supreme Court Justice Neil Gorsuch, we doubt it has much impact on political market drivers in America. Part of our optimism for stocks this year rests on our anticipation of gridlock, which reduces legislative risk by preventing or watering down radical proposals. The less Congress can change the laws or rules of commerce, the easier it is for businesses to plan and invest, and the more investors are willing to take risk. While the nuclear option does grease the wheels in the Senate a bit, it doesn't end gridlock. For one, Thursday's change applies only to Supreme Court appointments. The nuclear option for lower court and cabinet appointments was eliminated in 2013 by the then-majority Democratic Senate. Two, the Republican Party itself is divided, with a large contingent of budget hawks and #NeverTrumpers quite willing to defy party whips and the Trump administration. They have already blocked big legislation during Trump's term, and they probably won't stop. Irrespective of rule changes, intraparty gridlock is a force to be reckoned with and an underappreciated positive for stocks.

What about the long-term impact of Senate rule changes? We aren't saying it's nonexistent, but it's also unknowable today, so it shouldn't influence your market outlook. Stocks are forward-looking, but not infinitely so. They generally price in what's likely to happen over the next 3 to 30-ish months. Further out than that, there are simply too many unknowable variables, making it impossible to assess probabilities. Anyone can guess at possibilities. But stocks don't discount the possible. They move on probabilities. Hence, we'd urge investors not to waste much time, energy and sanity fretting the far future.

None of this week's events change our market outlook. We think the bull market will remain alive and well, powered by falling political uncertainty-especially in Europe, as widely feared elections come and go. As the uncertainty fog lifts, investors will have a better view of the world around them, and they'll see a lot of economic hustle and bustle. The world is growing, with several pockets accelerating. Global trade is up. So is lending and broad money supply in most major economies. Earnings are accelerating. Whatever short-term troubles arise here and there, this should remain a marvelous time to own stocks.

Have a great weekend.