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Markets React to Syria Volatility

Markets have historically discounted events like this way ahead of the fact


Stocks opened the new week with a bounce in their step and a song in their hearts, but flipped over and closed down pretty hard once the White House indicated it was ready to use military means to persuade Syria to quit gassing its citizens. Independent authorities suggested that President Obama and his counterpart in the United Kingdom might give the order to fire cruise missiles at the Assad regime in Damascus as soon as midweek.

The prospect of a military response, especially in a highly volatile region of the world that lacks clear-cut good guys worthy of support, served to heighten tension among Wall Street traders. Investors live constantly in a world of guesswork, since no one can know the future with any certainty. Yet, there are certain moments when a new dynamic causes fresh doubts to enter the decision-making matrix.

It’s not like no one expected the Syrian civil war to drag on, but until word was confirmed over the weekend that the Syrian government unleashed chemical weapons on civilians, there was an expectation that U.S. and eurozone powers might manage to sidestep the need to intervene.

The snap expectation among most investors is that war is bad for stocks, but that is not necessarily true. The initial U.S. attack on Baghdad, known as “shock and awe,” came on March 19, 2003, which was the second week of what would become a four-year bull market in stocks. The U.S. and eurozone powers rained bombs down on the former Yugoslavia for months during the Serbian conflict in the mid-1990s, and neither U.S. nor London markets flinched. The U.S. and U.K. attack on Libya in 2011 did come during a bearish trend in the spring of 2011, but it’s hard to say if there was a direct negative influence.

If you think about it for a second, unless an attack is truly a surprise, there is normally some set of events in the world that is already causing turmoil. Historically, that turmoil has been mostly “discounted” by markets by the time military action begins. The armed attack is thus often considered the beginning of the end of the conflict, so the market actually sees it as an opportunity to discount the termination of current fears — not the beginning of a new spate of uncertainty.

The bottom line is that although investors appeared to hit the sell button as a result of Secretary of State John Kerry’s bellicose remarks on Monday, the initial reaction is likely to be reversed in coming days, all things being equal.

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